Square Business Model Explained

Square is a merchant services aggregator and mobile payment provider based in San Francisco, California. On December 1st, 2021, the company changed its corporate brand name from Square, Inc. to Block, Inc. to better reflect its broader product ecosystem. However, the Square product brand will continue offering integrated hardware and software products, including the Square point-of-sale (POS) system, to help businesses run their operations. 

Founded in 2009 by Jack Dorsey and Jim McKelvey, Square has become a well-known provider of innovative payment solutions for small businesses and individual sellers. In 2021, Square (now Block) reported a Gross Payment Volume of $167.7 billion, an increase of 49% from 2020. Its gross profit for the full year was $4.42 billion, an increase of 62% from 2020. 

Square (Block) attributes its rapid growth to its unique ability to provide merchants with a one-stop solution for accepting in-person, online, and mobile payments. Its aggressive expansion into new markets and product categories also fuels its growth. To better understand the Square business model, let’s look at how it makes money.

Bottom Line Up Front

Block, formally Square, relies on the CashApp ecosystem and Square hardware to turn a profit. The company’s main source of revenue is transaction-based fees, which it charges for every credit and debit card payment processed through its platform. It also offers financial services, such as small business loans and merchant cash advances, which generate additional revenue.

Square’s Competitive Advantage

Square competes in an industry with well-established companies, such as PayPal, Shopify POS, Intuit, Toast POS, Shopkeep, and Stripe payments. 

The company’s main competitive advantage stems from its simplified pricing structure tailored to suit its ecosystem of products. The pricing model is competitive and easy to understand, making it attractive to small businesses. Additionally, the company doesn’t require long-term contracts, making it easy for merchants to switch to its services.

Another competitive advantage that Square has is its efficient and user-friendly platform. The company’s interface is designed to be easy to use, and it offers many features that help businesses run their operations smoothly. For example, the software automatically logs sales data, making it easy for companies to track their performance. 

Different merchants get different pricing models from Square depending on their location, type of business, and processing volume. The company tries to match its pricing to the value it creates for the merchant. For example, it offers free invoice and appointment software to small businesses with low volume processing. Larger companies receive discounts on transactional fees and access to advanced features, such as invoicing and inventory management. 

Square’s Business Model Explained

Square is in an attempt to change the way people handle money. Their unique take on business provides individuals and small businesses access to modern financial services traditionally available only to large corporations. By changing the status quo in finance through technology, they hope to empower people and businesses worldwide to participate in the global economy. 

Most of Square’s revenue comes from providing payment processing services to businesses. Its P2P CashApp service is its main driver of growth. CashApp allows users to send and receive money from friends and family easily. The service also allows users to buy and sell Bitcoin. Square earns a small fee for each transaction processed on CashApp. 

The company also offers other services to businesses, such as invoicing, inventory management, and appointment scheduling. Merchants can use these services to manage their businesses more effectively.

Square bases its marketing strategy on free products and services. The company offers free software to small businesses to help them start processing payments. It also provides free appointment scheduling and invoicing software to businesses. These products help the company attract new customers and build loyalty among existing ones. 

How Does Square Make Money?

Block Inc., formally Square Inc., makes money from two primary revenue segments: CashApp and Square. The CashApp segment makes up for most of the company’s total revenue. The Square part of the business involves the company’s hardware and software products it offers to merchants. 

1. CashApp Ecosystem

CashApp is a peer-to-peer (P2P) mobile payment service that allows users to transfer money to one another without the need for a bank account or credit card. The service is popular among young adults and boasts over 36 million active monthly users as of 2021. During the same year, CashApp reported revenue of $1.31 billion from transactional and subscription fees, a 63% increase from 2020. 

Q4 FY 2021 revenue from CashApp Bitcoin was $1.96 billion with a gross profit of $46 million. For FY 2021, CashApp contributed $12.32 billion in revenue, an increase of 119% YOY, and a gross profit of $2.07 billion, representing an increase of 69% YOY. Through CashApp, Square also provides merchant services, such as the ability to accept payments and access funding. 

While it’s likely that future Bitcoin prices may drop due to the volatile nature of cryptocurrencies, the asset class continues to grow in popularity. CashApp allows users to buy and sell Bitcoin and has plans to roll out support for other cryptocurrencies in the future. This strategy gives Square a first-mover advantage in the cryptocurrency space and positions the company well for future growth.

See also: How Does Zoom Make Money

2. Payment Processing

Payment processing is part of Square’s merchant services ecosystem, including invoicing, appointment scheduling, and e-commerce. The company charges businesses a 2.6% + $0.10 fee for every credit and debit card transaction processed through its platform. The company charges a 3.5% + $0.15 fee for manually entered transactions. 

Square recorded $167.7billion in transactional volume in 2021. Gross profit for transactional-based services was $1.18 billion in Q4 FY 2021, lower five basis points sequentially. The total gross payment volume (GPV) was $46.3 billion in the same quarter, increasing 39% year-over-year (YOY). 

3. Banking-Loans

Square offers small business loans through its Square Loans arm. The company uses data generated from its payment processing platform to assess the creditworthiness of borrowers and offer loans with competitive APRs. Loan eligibility depends on business type, location, and processing volume. 

The company deducts a fixed amount from the borrower’s daily sales until the loan is paid off. If you happen to sell more today, sales go up, whereas the payment is automatically adjusted if you have a down day. This structure gives peace of mind to the borrower and aligns the company’s interest with that of the borrower’s success.

So far, the company has funded 460,000 loans totaling $9 billion. The company doesn’t disclose much information about the fee but says it’s “competitive” compared to other small business lenders. It requires that Merchants pay 1/8 of the loan amount within 60 days, even if it isn’t fully funded. 

4. POS Hardware and Software Sales

Square provides businesses with POS hardware, such as terminals, stands, and readers. The company also manufactures its contactless and chip card readers that work with mobile devices like smartphones and tablets. By selling POS hardware, Square can capture a larger share of the value generated from each transaction processed on its platform. 

The Square POS software is free to install. However, users have to pay $49 per month for hardware costs. Non-contactless card readers cost $10, portable terminals cost $299, first-gen iPad stands $129, second-gen iPad stands built-in with card reader $149, and register kit with stand and iPad at $646.

A full Square register and terminal costs $1,329. The terminal includes an iPad stand, a receipt printer, a cash drawer, and a chip card reader. A Square terminal with a built-in card reader costs $799. The company also generates revenue from add-on services like employee management, Square marketing, Square loyalty, Gift cards, and Square Payroll.

5. Tidal

Square diversified its portfolio by acquiring Tidal, a music streaming service, in March 2021. The company paid $297 million for a majority stake in the business. While Tidal’s financial performance hasn’t significantly impacted Square’s stock price, the acquisition gives the company an entry into the growing streaming market. 

Tidal makes money through four subscription plans.

  • HiFi – $9.99/Month 
  • HiFi Plus – $19.99/Month 
  • Family HiFi – $14.99/month 
  • Familty HiFi Plus – $29.99/month 

The Q4 FY 2021 results were the first to hint at Tidal’s contribution to Square’s business. The company’s “Other” category, which includes Tidal, reported $55.7 million in net revenue. Square didn’t own Tidal for the entirety of Q4 FY 2020, so it isn’t easy to make year-over-year comparisons. However, its Q3 FY 2021 results show that the “Other” category generated $57.7 million in net revenue.

It’s very early to say how successful Tidal will be under Square’s ownership. However, if the company implements its strategy to involve CashApp influencers in promoting the service, Tidal could see significant growth.

See also: How Does Grubhub Make Money

How Square Makes Money from Other Software and Services

Below are some of the add-ons that help Square generate revenue: 

1. Team Management

Square (Block) offers businesses an integrated team management solution that tracks employee hours, schedules shifts, and manages payroll. It also provides valuable analytics, such as sales by employee and shift. The Team Management software is free for all locations, but the Team Plus version costs $35/location/month.

2. Square Marketing

The company’s marketing solution helps businesses create and track campaigns, manage customers, and measure results. It integrates with the POS software to provide data-driven insights. The cost of Square Marketing depends on the number of locations and starts at $15/month/location.

3. Square Loyalty

The Loyalty Program software helps businesses keep customers and increase sales. It lets customers earn rewards, such as discounts and freebies, for shopping at the business. Merchants can customize the rewards scheme by setting parameters and tracking progress in real-time. The cost of Square Loyalty starts at $45/month.

4. Payroll

Square provides online payroll services to businesses in the US. It integrates with the POS software to automatically calculate hours worked and generate pay stubs. The software automatically files taxes and makes it easy for businesses to offer employees health insurance and other benefits. 

The cost of Square Payroll starts at a $35 monthly subscription plus $5 per monthly fee per person for paying employees and contractors. When paying contractors alone, merchants have to pay $5 monthly per person paid.

5. Gift Cards

Merchants can also sell physical and digital gift cards through Square POS software. The company charges a $2.9% +0.30 transaction fee for processing digital gift cards. Its starter packs cost $40/pack, while quick cards cost $0.95 each for a minimum 75 card pack. 

Square also sells custom cards such that you have to upload your design, and they print, cut, and ship the cards to you. These custom gift cards start at $0.80/card for a minimum 75 card pack.

Square Market share and Competitor Insights

According to Slintel, Square controls 22.12% of the POS market share. Through its effective marketing and expansion efforts, the company has acquired a large customer base.

Some of Square’s competitors include Intuit QuickBooks, cloud-based accounting software with a POS system, and PayPal, a digital payment company with POS capabilities. Other companies with similar offerings include Stripe payments, Toast POS, Epos Now, Shopify POS, and Revel POS.

To stand out in the market, Square offers low transaction fees, easy-to-use software, and a wide range of features. The company has also been expanding its ecosystem by acquiring other companies and launching new products.

For example, in August 2021, Square entered into a deal that saw it acquire Afterpay, a popular “buy now, pay later” service in Australia. The move will help Square expand its payment offerings and tap into the growing demand for alternative financing options.

While its competitors offer similar features and services, Square has maintained its position as a market leader through its focus on innovation and expansion.

Square Business Model Explained (FAQs)

Question: What does Square Company do?

Answer: Square is a financial services, merchant services aggregator, and mobile payment company based in San Francisco, California. The company provides credit card processing and point of sale (POS) systems for small businesses and individuals. It also offers invoicing, gift cards, digital receipts, and loyalty programs.

Question: Why is Square so popular?

Answer: Square is popular because it offers many features and services, including credit card processing, POS systems, invoicing, gift cards, digital receipts, and loyalty programs. The company is also popular because of its simplified pricing structure and easy-to-use software.

Question: What’s unique about Square?

Answer: Unlike other POS systems, Square doesn’t require a long-term contract. This uniqueness makes it an attractive option for businesses starting or who don’t want to be locked into a contract. Square also offers a free trial of its POS system, allowing companies to try the software before committing to a paid subscription.

Question: Does Square take a percentage?

Answer: Square takes a 2.6% + $0.10 cut of every swiped transaction, 3.5% + $0.15 per keyed-in transaction. The low transaction fees ensure businesses stay competitive, while the wide range of features and services helps businesses grow.

Conclusion

Square is a popular payment processing and POS Company that offers various features and services. It makes money through transaction fees, monthly subscription fees, and merchant services. Through CashApp, people can send and receive bitcoin. 

Square has also expanded its ecosystem by acquiring other companies and launching new products. The company’s simplified pricing structure and easy-to-use software make it an attractive option for businesses.

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