Changes in the digital payments sector could bode well for Square (SQ) going forward

The COVID-19 pandemic and the restrictions that came with it pushed people to online transactions more than ever. This was not only due to the fact that folks who stayed at home moved to online purchasing for the sake of convenience but also because the pandemic led to an aversion among people to exchange cash for fear of contracting the virus.

This led to an increase in contactless payments and this trend is expected to continue over the coming months. Square Inc. (NYSE: SQ), which provides cashless payment services, is poised to benefit in this scenario. The stock has jumped nearly 200% since the beginning of this year and over 47% in the past three months.

Advantages

Over the past couple of years, there has been an increase in cashless payments which has benefited Square’s business. Looking at the past five years, Square has seen a steady increase in its Gross Payment Volume (GPV) from $35.6 billion in 2015 to $106.2 billion in 2019. This reflects an increase of around 200%.

In the first quarter of 2020, GPV increased 14% year-over-year to $25.7 billion. However, in the second quarter, GPV dropped 15% year-over-year as the pandemic affected many of its customers but despite the overall drop, GPV increased sequentially each month of the quarter.   

Square has witnessed an expansion in its seller ecosystem. While the company has gained most of its business from small enterprises earlier, this has now increased to medium and large enterprises as well. In its most recent quarter, 52% of its GPV came from large sellers. The gain in larger customers will boost the company’s top line.

Square has been seeing strong adoption of its products with its Cash App registering a 361% increase in revenue in the second quarter of 2020. Excluding bitcoin, revenues were up 140%. The growth was boosted by gains in Cash Card, Boost, direct deposit and bitcoin investing.

Square is set to benefit from the rapid move to cashless payments that is taking place now. Last month, the company published a report that stated that the decline in cash usage seen this year would have taken three years without the pandemic.

During the period from February to April, cashless Square sellers rose from 5.4% to 23.2%. This number stabilized at 13.4% by August but it still indicated a significant increase in cashless adoption rates versus pre-pandemic levels. Among payments transacted at US Square sellers, during the time frame from February to August, the share of cash transactions fell from 37% to 33%.

Risks

A large part of Square’s seller base is comprised of small businesses that have been hurt by the pandemic. This is taking a toll on its operations, one example being reduced support for Cash App due to certain vendors shutting down. The company still faces uncertainty due to the health crisis.

Although Square has increased its revenues consistently over the past few years and quarters, its growth rate has remained relatively sluggish with only one or two spikes in between. The company has also been generating losses with only 2019 churning out an income. The slow growth rate and elusive profit remain causes for concern.

Square also faces competition from Apple (NASDAQ: AAPL) which rolled out Apple Card last year. It is a challenge to keep up with its very large rival in terms of resources and investments.

Despite these challenges, Square appears well-positioned to take advantage of the growth in the cashless space and this could help boost its business significantly going forward.

Square is set to report its third quarter 2020 earnings results on November 5, 2020.

Click here to read the full transcript of Square Q2 2020 earnings conference call