In a world where physical cash becomes more and more obsolete, Square may well be on its way to turning traditional banking on its head.
By the end of 2018, the U.S. banking system had $17.9 trillion in assets and net income of $236.8 billion, so it’s no surprise that Square (NYSE: SQ) wants a piece.
And that’s exactly its plan through the launch of its own banking service under the somewhat confusing guise of ‘Square Financial Services’.
Square’s main business model already includes point-of-sale credit card transactions and peer-to-peer payments, so you would be forgiven for thinking that they were already a financial service provider.
However, Square Financial Services (SFS) is a little different. Square has now gotten itself a fully (and federally) regulated bank, which will offer business loans and allow it to be the primary provider of financing for its millions of sellers across the U.S. In a nutshell, this allows Square to act like a real bank!
This is a massive step forward for the company and investors should take note. Not only does it give Square entry into the massive banking market in the U.S., but it also gives them a leg-up on its traditional competitors such as PayPal — who usually just partner with an existing bank.
Other benefits include:
- Diversification: Its financial portfolio is now further diversified, and thus the business is better able to weather volatility from its other investments, such as Bitcoin.
- Crash-proofing: To reduce balance-sheet exposure, Square will sell some of its loans to third-party investors, so should a financial crash similar to 2008 occur, it doesn’t have all of its eggs in one basket.
- Ecosystem: A small-business owner that uses Square’s payment solutions can now seamlessly apply for a loan with Square Financial Services and thus continue to reap the benefits of its partnership with the Jack Dorsey-owned business. They stick with Square through their entire product lifecycle.
Square investors may be witnessing the next step in Square’s business model, and it could be turning traditional banking on its head.
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