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Entrepreneur
Kurra Bewarse
Username: Entrepreneur

Post Number: 3298
Registered: 05-2011
Posted From: 65.35.45.47

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Posted on Tuesday, March 02, 2021 - 8:36 pm:   

Square's financial service offerings rounding into shape after its industrial bank officially launches (255.14 +14.19)

Fueled by the rampant success of its digital payment platform, Cash App, Square (SQ) has been on an extraordinary role. Since this time last year, its stock has skyrocketed by nearly 230% as the company's top-line growth rate has exploded into triple digit territory. Today, shares are once again on the move higher following SQ's announcement that its industrial bank, Square Financial Services, has officially begun operations. This development adds another layer to the company's growth prospects, thereby, enticing a new wave of buying from investors.

Initially, this news may seem a little confusing because SQ already has a financial services branch called "Square Capital" which provides loans to small business owners. However, the loans originated through Square Capital are funded by third party lenders. While this approach limits SQ's balance sheet risk, it also reduces its income generating potential since it doesn't collect interest payments.

With the approval from the FDIC and the Utah Department of Financial Institutions, SQ is now legally authorized to act as a bank, providing business loans and deposit products. The company's plan is to make Square Financial Services the primary lender for U.S businesses, essentially replacing Square Capital.

Investors shouldn't anticipate an immediate windfall, though.

While SQ's popular Cash App and its ability to facilitate Bitcoin transactions has produced remarkable growth, the company's seller ecosystem continues to be hamstrung by the pandemic. In Q4, gross profit in the seller ecosystem was up a rather modest 13% as brick-and-mortar stores and restaurants grapple with ongoing restrictions and capacity limitations. Consequently, SQ has significantly pulled back on offering new loans through Square Capital. In fact, loans facilitated in Q4 plunged by 62% yr/yr.

As local economies continue to reopen and as a sense of normalcy returns, SQ's business lending activity will likely pick up. However, the pace of acceleration may be very gradual since the company doesn't expect Square Financial Services to have a material impact on total revenue, gross profit, or Adjusted EBITDA in 2021.

In the meantime, momentum for Cash App continues to build while SQ's Bitcoin investments also pay hefty dividends. Any additional growth that the new bank provides this year will be icing on the cake. Looking beyond FY21, SQ now has another potent growth catalyst in its arsenal.

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