Square Inc: Banking the Unbanked
By: Amanda Graff & Ben Segal
The Ivey Business Review is a student publication conceived, designed and managed by Honors Business Administration students at the Ivey Business School.
From Square to Diamond
Square Inc. is a financial technology (FinTech) company that focuses on simplifying financial products and cash transfers through the use of technology. Founded in 2009 by Twitter CEO Jack Dorsey and entrepreneur Jack McKelvey, Square began as a digital payment processor designed for businesses looking to accept credit payments. Its point of sales (POS) system offers small and medium-sized businesses a comprehensive method to track sales and all data, streamlining their day-to-day functions. With no upfront fees or applications, Square generates revenue through transaction costs of 2.5 to 3.5 percent per payment.
Square’s product offerings have since expanded to a full suite of industry-specific financial tools, including business management solutions, physical terminals, and micro-loan advances. Square has also expanded its financial ecosystem with the internal development of the $40 billion peer-to-peer (P2P) lending platform Cash App. With these new offerings and its $29 billion acquisition of Afterpay, a Buy Now, Pay Later (BNPL) platform, Square aims to transform the payment process for stakeholders across the value chain.
The Circular Ecosystem of Square
Square’s ability to revolutionize how merchants and consumers interact with financial institutions has been the core of the platform’s success. Existing bank infrastructure is used on the back end, allowing Square’s consumers to store money, transfer funds, buy stocks, and directly acquire cryptocurrencies. By developing a vertically integrated digital ecosystem, Square can rival traditional bank providers and use its technology to usher in a new age of financial inclusivity.
Square’s large user base is indicative of a larger trend towards the adoption of digital banking. The global digital banking market is estimated to reach $30.1 billion by 2026, growing at a CAGR of 15.7 percent over this period. This growth is matched by the increasing popularity of other digital payment services, including online payment systems, mobile wallets, and cryptocurrencies, which are catalysts for a “cashless age.” Similar to Square, these competitors offer services through partnerships or licenses, and are rapidly expanding the current landscape of cashless payments, e-commerce, and digital banking.
Square’s end-to-end product offering and advanced infrastructure presents it with a unique opportunity to expand its geographical reach. In particular, adoption of digital banking is rapidly growing in Southeast Asia. However, rather than building a presence in the region from the ground up, Square should look to acquire an existing player in the space and leverage its scale and infrastructure.
Southeast Asia: In the Right Shape
A largely unbanked middle class and high levels of digital literacy work in tandem to make Southeast Asia a prime market for Square. By 2022, the size of the Southeast Asian middle class will have doubled from 2012, reaching 350 million people. While these consumers have increasing disposable income and a demonstrated appetite for online shopping, only 18 percent in the region have access to credit, financial services or investment products. Both foreign and local startups are eager to capture this underserved and potentially lucrative market, as annual revenues generated from digital financial services is expected to triple to $38 billion from 2019 to 2025.
The large unbanked population has also become a significant concern for regional leaders, who see it as a hindrance to economic development. The extent of this issue has been highlighted by the Association of Southeast Asian Nations (ASEAN), which has named financial inclusion for economic development one of their top priorities for the next five years. Given that investments in financial inclusivity is a top priority for ASEAN governments, the population’s access to digital banking is expected to increase. Similarly, digital and financial literacy is on the rise, with smartphone penetration reaching nearly 70 percent in Southeast Asia. As such, now is an opportune time for Square to enter this fast-growing and highly remunerative market before it reaches saturation.
Starting At Square One
Fintech providers entering Southeast Asia not only have the opportunity to onboard new consumers into the world of digital banking, but can also provide a full suite of financial services including lending and wealth management. Moreover, the digitization of financial services in other previously unbanked markets illustrates a potential pathway for Square’s move into Southeast Asia. Between 2017 and 2019, the number of e-wallet users grew from 500 million to 2.1 billion, globally. Together, China and India, two previously underbanked regions, now account for 70 percent of all e-wallet users. When fintech companies launched their services in these countries, they started with a handful of simple offerings. As consumers became familiar with their services, the companies expanded their service lines. In China, Ant Financial, the parent company of Alipay — China’s largest digital payment platform — is now a comprehensive finance platform that includes savings accounts, loans, and investment products. Square can use these precedents as a proxy for how it can usher Southeast Asian consumers into digital banking.
Dial ‘M’ for Merger
To successfully integrate Square into a changing Southeast Asian environment, it will take significant time and resources to acquire and retain customers. With a 55-percent increase in the consuming class by 2030 and digital payments expected to hit $1 trillion in the next five years, Southeast Asia’s market is growing rapidly. While onboarding the 73 percent of the population classified as underbanked onto a new platform will create a challenge, Square’s robust infrastructure and technical expertise makes it one of the only players that can undertake such a project. Since most of the unbanked population cite distrust as one of their key decision drivers, Square can build trust with an unfamiliar consumer base by combining operations with an existing fintech company. More specifically, super-apps in the region have seen rapidly growing demand. Super-apps are one-stop-shop apps that encompass many aspects of personal and commercial life, such as ride hailing, food delivery, online shopping, personal finance, and merchant payments. The concept was first popularized in China through the mass adoption of WeChat, and has since eliminated the majority of cash transactions. Since WeChat’s success, many fintech companies in Southeast Asia have attempted to implement a similar business model.
Grab, a Singapore-based super-app, is an ideal acquisition target for Square. The company currently offers delivery services, ride hailing, payments, hotel bookings, and personal finance products to 180 million users across 330 cities and 8 countries in the region. Additionally, Grab had the highest brand score among Singaporean millennials in 2019. Given its massive user base and strong brand recognition, an acquisition would allow Square to successfully capture the Southeast Asian target market.
The proposed acquisition would also be attractive to Grab, as it would allow Grab to utilize Square’s financial and technological assets to expand its product offerings. This would strengthen Grab’s competitive advantage against other Southeast Asian super-apps in an increasingly competitive environment. GoJek, an Indonesian-based super-app, has become a stronger competitor against Grab through its merger agreement with Tokopedia, an Indonesian e-commerce giant. The deal expanded GoJek’s user base and allowed it to develop new products like GoPay. Sea, another Singapore-based super-app, is also quickly growing its digital payments and financial services arm, SeaMoney. In Q3 2021, SeaMoney reached 39.3 million paying users and processed $4.6 billion in payment volume, representing 120 and 111 percent year-over-year growth. Moreover, commercial banks, recognizing the growth potential of digital banking, have launched their own e-wallets or partnered with super-apps.
Squaring Up for Southeast Asia
To compete with regional players and capitalize on increasing cashless payments in the region, post-acquisition Grab must maximize the breadth of its financial service and payments arm. Currently, Grab and Square both offer electronic wallets, consumer microloans, business insurance, P2P lending and BNPL. However, Grab currently lacks the physical payment infrastructure within Square’s expertise. Once Grab introduces Square-powered merchant terminals to its product offering, it will be able to capture the entirety of the payments value chain and strengthen the presence of its ecosystem. Furthermore, this would accelerate the transition from cash to cashless transactions. On the personal finance side, Grab’s personal investment service and rewards programs, as well as Square’s cryptocurrency trading capabilities through Cash App, will offer both companies a more expansive product mix. In determining who will win in this space, consumers and merchants will look for a service that is trustworthy, innovative, and expansive. Combined, Square and Grab can produce a comprehensive digital financial ecosystem that captures the underserved Southeast Asian market for decades to come.