There probably will not be dancing in the streets of Melbourne, with the latest COVID lockdown, but you can be sure that there is excitement on Market Street in San Francisco, where both Square and Afterpay have their U.S. Headquarters.
The two firms will celebrate, that is certain. Square’s recent Afterpay acquisition brings value to both firms, but the most crucial facet is how Afterpay rounds out Square’s merchant offering. BBC announced the AUD 39 billion deal and noted:
- The agreement will create an installments payment giant as the industry sees significant growth.
- “Square and Afterpay have a shared purpose. We built our business to make the financial system more fair, accessible, and inclusive, and Afterpay has built a trusted brand aligned with those principles,” Square co-founder and chief executive Jack Dorsey said in a statement.
- The agreement means that Afterpay will be able to expand more quickly in America. Its latest annual figures showed sales in the U.S. nearly tripled for the period to $8.15bn.
- At the same time, Square announced second-quarter earnings that showed gross profit rose 91% to $1.14bn compared to the same period a year ago.
The official Square announcement talks about the broader benefit to Square’s Cash App:
- “The addition of Afterpay to Cash App will strengthen our growing networks of consumers around the world while supporting consumers with flexible, responsible payment options,” said Brian Grassadonia, Lead of Square’s Cash App business. “Afterpay will help deepen and reinforce the connections between our Cash App and Seller ecosystems, and accelerate our ability to offer a rich suite of commerce capabilities to Cash App customers.”
With three summarizing bullets:
For Square, BNPL presents an attractive opportunity supported by shifting consumer preferences away from traditional credit, especially among younger consumers, consistent demand from merchants for new ways to grow their sales, and the global growth in omnichannel commerce. Combined, Square and Afterpay’s complementary businesses present an opportunity to drive growth across multiple strategic levers, including:
- Enhance both the Seller and Cash App ecosystems.
- Bring added value, differentiation, and scale to Afterpay
- Drive long-term growth with meaningful revenue synergy opportunities.
The broader picture is about how Square is vertically integrating the merchant finance market. On July 20, 2021, the firm announced Square Banking, “a suite of powerful financial tools for small businesses.”
- Today, Square launches Square Banking, a suite of financial products purpose-built to help small business owners easily manage their cash flow and get more out of their hard-earned money. Coming on the heels of Square’s industrial bank, Square Financial Services, beginning operations in March, Square Banking represents a major milestone in Square’s continued efforts to expand access to financial tools for underbanked populations and marks the beginnings of the company’s journey to provide more banking solutions to small businesses.
- Square Banking consists of three core products designed to help small business owners confidently manage cash flow stress: two new deposit accounts, Square Savings and Square Checking join Square’s existing lending capability, now called Square Loans.
What Mercator sees in the Afterpay acquisition is a well-rounded strategy to address the merchant market. Sure, merchant finance is not new, nor is business banking, but when you tie them together with a well-honed BNPL financing option, merchants will be enticed with the offering.
However, the play brings a new task to Square. Will they tighten up lending? We hope so. Will they increase lending clarity? We think so. Will they displace Visa Installments or PayPal’s Pay-in-Four? Well, maybe not. They will, however, amp up BNPL a notch further, that is for sure.
Overview provided by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group