Square's convenience and advanced hardware led to a strong quarter (SQ)

BII

This story was delivered to BI Intelligence "Payments Briefing" subscribers. To learn more and subscribe, please click here.

A 42% year-over-year surge in gross payment volume (GPV) helped Square to post better-than-expected results in its third quarter as a public company.

GPV reached $12.5 billion in Q2 2016, driven by growth among new merchants, particularly large sellers. As Square expands, its losses are narrowing, a sign of maturation and strength as it moves further away from its tumultuous IPO.

Large sellers now account for $5.25 billion, or 42%, of Square's GPV. Square puts merchants with more than $125,000 in annual GPV into this group. And these sellers’ volume, up 61% YoY, is growing faster than Square’s GPV overall. 

Square is improving its ability to profit from these larger merchants. Previously, as Square extended to more larger sellers, its take rate, defined as transaction revenue as a percentage of GPV, declined. That was largely because Square often caved to larger sellers’ demand for low processing fees in order to win deals. But this quarter, the firm’s take rate rose back to its Q4 2015 total, which indicates that Square has improved its negotiating power and ability to sell rates that are lucrative while still attractive to bigger sellers.

Several Square features likely helped boost its negotiating power:

• Convenience: Square’s intuitive platform is a major draw for large sellers, according to CEO Jack Dorsey’s Q2 2016 shareholder letter. That’s because it allows vendors to train employees on the platform in a “matter of minutes,” which is particularly valuable to large retailers who need to train multiple employees at several stores. And because all of Square’s services are offered through a single application, it also prevents merchants from having to “stitch together” services from a variety of vendors, according to Dorsey. 
• Value-added services: Large merchants are looking for quick access to capital, which Square can provide through its working capital arm and Instant Deposit features. The firm also offers a number of additional services, like invoicing, inventory, and employee management, through its dashboard. Those services drive up Square’s value proposition and could make it easier for the firm to negotiate a higher rate.
• Advanced hardware: Though Square didn’t mention this in its results, the firm offers a relatively inexpensive chip card and contactless reader. New payment technologies and the protection that EMV technology offers might be more valuable to larger merchants, who are more at risk for fraud and see a more diverse group of customers.

Mobile payments are becoming more popular thanks to companies such as Square, but they still face some high barriers, such as consumers' continued loyalty to traditional payment methods and fragmented acceptance among merchants. But as loyalty programs are integrated and more consumers rely on their mobile wallets for other features like in-app payments, adoption and usage will surge over the next few years.

Evan Bakker, research analyst for BI Intelligence, Business Insider's premium research service, has compiled a detailed report on mobile payments that forecasts the growth of in-store mobile payments in the U.S., analyzes the performance of major mobile wallets like Apple Pay, Android Pay, and Samsung Pay, and addresses the barriers holding mobile payments back as well as the benefits that will propel adoption.

Here are some key takeaways from the report:

• In our latest US in-store mobile payments forecast, we find that volume will reach $75 billion this year. We expect volume to pick up significantly by 2020, reaching $503 billion. This reflects a compound annual growth rate (CAGR) of 80% between 2015 and 2020.
• Consumer interest is the primary barrier to mobile payments adoption. Surveys indicate that the issue is less the mobile wallet itself and more that people remain loyal to traditional payment methods and show little enthusiasm for picking up new habits.
• Integrated loyalty programs and other add-on features will be key to mobile wallets taking off. Consumers are showing interest in wallets with integrated loyalty programs. Other potential add-ons, like in-app, in-browser, and P2P payments, will also start fueling adoption. This strategy has been proved successful in China with platforms like WeChat and Alipay.

In full, the report:

• Forecasts the growth of US in-store mobile payments volume and users through 2020.
• Measures mobile wallet user engagement by forecasting mobile payments' share of their annual retail spending.
• Reviews the performance of major mobile wallets like Apple Pay and Samsung Pay.
• Addresses the key barriers that are preventing mobile in-store payments from taking off.
• Identifies the growth drivers that will ultimately carve a path for mainstream adoption.

To get your copy of this invaluable guide, choose one of these options:

1. Subscribe to an ALL-ACCESS Membership with BI Intelligence and gain immediate access to this report AND over 100 other expertly researched deep-dive reports, subscriptions to all of our daily newsletters, and much more. >> START A MEMBERSHIP
2. Purchase the report and download it immediately from our research store. >> BUY THE REPORT

The choice is yours. But however you decide to acquire this report, you’ve given yourself a powerful advantage in your understanding of how mobile payments are rapidly evolving.