Square Research Report

Coming Full Square

Square, Inc. is a leading mobile payments aggregator and service provider for micro and small merchants. The company has recognized the challenges in its core business and has diversified to financial services and consumer services. The competitive landscape is getting increasingly crowded with a number of new entrants, some very large. Card-present payments will remain a good business for the next 12-36 months but likely be pressured by new technologies. Square has regrouped with a stronger product leadership team, sufficient liquidity, and a sense of urgency. But perfect execution and constant innovation will be highly critical in the next 12 to 18 months. We have reasonably high conviction in the company’s ability to do both. We are initiating coverage with a cautiously positive thesis.

METHODOLOGY

Our views on Square are derived from our rigorous research process involving proprietary channel checks with merchant users, competitors, and experts in the mobile payments space.

KEY POINTS

  • Square 2.0 – Back in Play. Square has regrouped and reemerged with a diversified and sufficiently funded business plan. The company, well known for slick products and elite branding, has gone back to introducing small business focused products and services to differentiate itself from a growing list of competitors, some large. Today the company offers, besides its core small/medium merchant payment aggregation and processing services, business loans, peer-to-peer cash transfers, payroll, food delivery, and other value-added services.
  • The Market Opportunity is Large; Competition is Intense. Mobile payments adoption has materialized and we expect this space to grow rapidly over the next 12-36 months. According to eMarketer, the mobile payments market is expected to grow to $118B by 2018 from $3.5B in 2014. Square’s other markets are growing as well. Increasing commoditization, higher comfort level with mobile payments, and low barriers to entry have intensified the competitive landscape. We see PayPal Here, Amazon Local Register, Intuit’s GoPayment as the closest pure-play competitors.
  • Operating Profit Still Elusive. We estimate that Square exited 2014 with roughly $30B in transaction volume and $831M in revenue. For 2015, we have modeled roughly $42B in payments transaction volume and $1.2B in gross revenue, including minor contributions from financial and consumer services. We expect the company to be EBIT positive in late-2016.
  • Prominent Risks. We see two near-term risks to our thesis: delayed profitability and execution risk. Higher than expected customer acquisition costs and investments in new business initiatives could delay operating profitability beyond our forecast of late-2016, and the company’s past stumbles and Jack Dorsey’s divided attention could pose execution risks. Longer term, card-present payment will not be relevant as greater virtualization of payment is coming.

Valuation at $6.4B, or $17/Share. Our blended valuation, based on comparable public trading multiples and recent take-out multiples in the payments space, is a 21% premium to the last private round valuation of $5.3B in October 2014. We believe there is room for valuation upside given our conservative growth estimates.

Exhibit 1: Competitive Landscape

 

 

 

 

 

 

 

 

 

Source: Manhattan Venture Research

Exhibit 2: Gross Revenue Trend ($M)

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Source: Manhattan Venture Research

Investment Thesis

Initiating Coverage on Square with a cautiously positive thesis

Will Square succeed after failing to capitalize on its first-mover advantage? That is the sixty-four-thousand-dollar question today in the face of a rapidly evolving and highly competitive industry landscape. The answer two years back would have been a firm negative. Today, however, we have a better conviction on the company’s ability to execute and succeed.  Square has strengthened its management team, gone back to innovating new products and broadened its service offerings. The company has maintained its strong brand name and a highly coveted micro-merchant customer base. It has strategic relations with Visa and Apple and a host of influential investors and board members that provide an added layer of support. That said, we believe the next 12 to 18 months will be highly critical in the company’s evolutionary cycle. The competitive landscape has intensified, barriers to entry are lower, and the margin of error in execution is minimal. On balance, we have reasonably high conviction in the company’s ability to succeed in what we believe is its second incarnation.

Investment Positives

  • Well positioned to drive the next leg up. Square has over seven million merchant customers who use its services and remain loyal to the company, according to our estimate. The company’s early entry into the small merchant mobile payment aggregating business, combined with innovative products, compelling pricing strategy, and effective branding have been key drivers. Square has diversified into financial services (merchant loans, P2P cash transfers, and payroll) and consumer services (food delivery and miscellaneous services). While all these are high growth markets, the key is going to be Square’s ability to stay focused, keep costs down, and execute to perfection. We believe the company has the right team to accomplish it.
  • Large addressable market. Square’s addressable markets are large and growing. The small business mobile payments market (Square’s end market) is expected to grow to $118 billion by 2018 from $3.5 billion in 2014 according to eMarketer; the online food delivery market in the U.S. was $9.0 billion in 2014 out of the total food delivery market of $70 billion; and Square’s small business loan portfolio was $100 million to 20,000 customers in just one year.
  • Exit on the horizon. Either an IPO or an outright acquisition is on the horizon. While we can make a case for a number of possible acquirers, we believe an acquisition by Visa or Amazon makes the most strategic sense. Square’s sizable small-merchant base of over seven million, over $30 billion transaction volume, valuable database, and a trusted brand name are attractive and accretive features for a potential acquirer.
  • Untapped international markets. Square is currently in the U.S., Canada, and Japan. International growth presents a compelling growth opportunity. Mobile payments grew 44% globally in 2013, to $235 billion, and expected to grow exponentially, in step with the rising penetration of smartphones, improved broadband connectivity, and rising comfort level in terms of privacy and security.

Investment Concerns

  • Highly competitive landscape as the lines of separation is getting blurred. Square squandered its first-mover advantage as the moat around the business built on a disruptive application and a slick device began to dissipate. The design and technology lead was significant. Today the barriers to entry are low, margins are razor-thin, and a number of larger companies have entered the marketplace.
  • Execution risk. Given its poor track record, we believe the execution risk is significant. Square needs Jack Dorsey’s undivided attention.
  • Profitability Still Elusive. The company needs to invest in its new initiatives. Accordingly, the risk of profitability getting pushed out beyond 2017 is significant.

Valuation

We peg Square’s fair value at $6.44 billion or $17.26 per share. Our valuation is based on the mean revenue multiple of comparable companies and means take-out multiples in the payments hardware/software space. This implied valuation is a 21% premium to Square’s last post-money valuation of $5.27 billion, or $15.46 per share, in October 2014 when the company raised $150 million. While we believe that Square could grow into a higher valuation, we are comfortable with our forecast at this point given the company’s past execution stumbles and low moat around its businesses.

Investment Positives

Well Positioned For the Next Leg Up

Square roared into the limelight in 2010 with a slick product and a great promise. Square Reader, an elegant device for swiping credit cards that plugged into phones via audio port, was revolutionary just as the company’s then-unique model of charging merchants a flat 2.75% rate per transaction. Square essentially unraveled the industry’s outdated cost structure with all its hidden fees. These innovations, in turn, appealed to a large and growing base of micro-merchants—cabs, farmer’s markets, baristas, florists, food-truck owners—who flocked to the service. It was cool and disruptive in an industry not used to disruptions. Small businesses that couldn’t use checkout counters for their customer transactions, loved the unparalleled convenience of the card readers. Doctors and other professionals ditched their traditional credit card readers for Square to save money.

Square had first-mover advantage. Transaction volume ramped up and a partnership with Starbucks validated its business model. But the hot streak that the company was on started to cool down. As the company tried to keep pace with its rapid growth, it lost its focus and execution began to falter. Partnership with Starbucks ended. Square Wallet, the company’s foray into the consumer side did not catch on and was losing money. Customer service also did not live up to the mark. Meanwhile, the company’s core mobile payment processing business started getting commoditized and competition started chipping away at the early lead.

Square has regrouped for its next leg up

Against this backdrop, Square needed to regroup and reposition itself. It needed stronger leadership at the top and a new product strategy based on its core strengths: cutting-edge innovation and simplicity. Furthermore, Square needed to diversify from its merchant-centric payments focus to a wider focus on engaging and value-added services to pull new users into its ecosystem and give all of them a compelling reason to remain inside the ecosystem. The dark clouds of commoditization and competition demanded a reset of the business model. The company did just that.

Square strengthened its management team and formulated a diversified business strategy to drive the next leg up in its evolution. The company hired Rajaram Gokul in 2013 to run the product engineering team in the payments and related business, and Alyssa Henry in 2014 to head up engineering operations for Square’s infrastructure and payments platform. Mr. Gokul was a former member of product development teams at Facebook and Google. Ms. Henry was a long time veteran of Amazon and ran the data storage business for Amazon Web Services.

The new leadership team made bold decisions and brought a sense of urgency to the company. Square Wallet and Square Order, which failed to meet expectations, were discontinued. The product suite has expanded beyond payment processing to value added services such as actionable analytics, inventory management, invoicing, online storefronts, business loans, customer relationship management and marketing, payroll, and a few other services. Additionally, the company has entered the food delivery business with an eye toward disrupting the space with innovative ideas. The online food delivery market is a $9 billion market and expected to grow, in step with the rising millennial population that is more disposed than others to use food delivery services.

Apple Pay Will Boost Square’s Transaction Volume

Square entered into a partnership with Apple to accept Apple Pay. Square will release a new card reader designed to allow small businesses to take Apple Pay payments as well as credit card chip payments, but not card swipes. The new wireless reader enables any business with a tablet or smartphone to accept Apple Pay and contactless payments, as well as EMV chip cards. The new Square Reader connects with Square Stand or wirelessly with a mobile device, and pairs seamlessly with Square’s free point-of-sale app. Local sellers — from brick-and-mortar shops to mobile businesses— can use the lightweight, compact, and wireless reader as part of their countertop point of sale, or slip it in their pocket to accept contactless and EMV payments on the go. The new reader costs $49 and will start shipping this fall. Additionally, Square will ship its standard magnetic card stripe reader with the new NFC/EMV card chip reader so merchants can accept all forms of payment. Square will earn its standard 2.75%  fee on all of these transactions.

Square’s end goal is to attract new customers, hold onto its existing base of roughly seven million merchants, and drive closer to profitability. By throwing a wide net of “sticky” services backed by good customer service and a strong brand name, we believe the company is well-positioned to succeed.

Large Addressable Markets

Square’s addressable markets can be broadly classified into three verticals: merchant payment processing and services, financial services, and consumer services. The market opportunity in each of these verticals is large, albeit competitive. Square is well positioned to establish – or maintain in the case of merchant aggregation – a strong competitive position in all the three verticals.

Mobile Payment Opportunity

Square’s target market is small merchants in the United States, Canada, and Japan. Looking specifically at the United States market, there are roughly 28 million small businesses comprising over 90% of all the businesses. More importantly, a mere 45% of them accept credit cards as a mode of payment, implying a large growth opportunity for Square.

Figure 1: Merchant Aggregation Opportunity

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Source: U.S. Census Bureau, SBA Report

Market opportunity in each vertical is large

Looking broadly, the mobile payment industry in the U.S., according to Forrester, is expected to see robust growth from $52 billion in 2014 to $142 billion by 2019.

Figure 2: U.S. Mobile Payment Industry ($Bil): 2014-2019E

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Source: Forrester Research, Manhattan Venture Research

A key driver is the growing penetration of smartphones and the introduction of mobile services such as Apple Pay.  Apple Pay is expected to accelerate much of the growth of in-person mobile payments at the register. According to Forrester, the market will reach $34 billion in volume in the United States by 2019, near tenfold increase from the current estimates for 2014.

Financial Services

Responding to the funding needs of small business owners and the growing demand for peer-to-peer (P2P) lending, Square introduced Square Capital in 2014 and Square Cash in 2013. As of 2013, according to the U.S. Small Business Administration, outstanding small business loans by banks amounted to $585 billion, and the value of loans under $100,000 increased by 2% or $2.8 billion. Not surprisingly, this vertical has a number of players who have established a strong competitive position. Prominent names include Kabbage, PayPal, Lending Club, and OnDeck, to name a few. To provide some perspective, Kabbage is expected to lend $1.0 billion in 2015 and PayPal had announced that it was planning to lend roughly $1.0 million a day in 2014. Similarly, the P2P market, while relatively new and smaller segment of the payments markets, has grown appreciably and is expected to maintain its strong upward trajectory. Prominent companies in this space beside Square – Venmo, PayPal, and Gmail – allow users to send money back and forth quickly. Forrester expects this activity to grow to $17 billion in volume in the United States by 2019, from $5.2 billion in 2014.

Square Capital, launched in May 2014, provides loans to small businesses at pre-negotiated fee averaging from 10% to 14%. The program began with an initial $50 million investment from Square’s own balance sheet and additional investment from Victory Park Capital and Colchis Capital. Within a year, the firm had lent $100 million to 20,000 merchants. Square Cash, launched in 2013, is a mobile payment system that allows businesses and peers to make and accept payments through their phones. Square Cash amounts are linked to “$Cashtags” that is an individual’s ID attained through sign-up on Cash.me website and linked to credit and debit payment accounts. While businesses pay 1.5% fee for the service for the service, the peer-to-peer transactions are free.

Consumer Services

Square entered the food delivery business in 2015 by combining its acquisition of Caviar with its more recent acquisition of Fastbite. The market opportunity for this business category is large and growing, driven in large part by the growing millennial population. The food delivery market size in 2013, according to Euromonitor, was $70 Billion. Looking deeper, the online order delivery market size was roughly $9 billion, or 13% of the total food delivery market. Not surprisingly, the competitive landscape is crowded with a number of players including GrubHub Seamless, Eat24, EatStreet, DiningIn, and Foodler. GrubHub Seamless is the market leader with a 19% market share of the $9 billion online delivery market. Square has to offer a highly efficient and differentiated service to gain a foothold in the industry. Even a modest 1% market share penetration could translate to a $90 million revenue upside to the firm’s topline.

Figure 3: Food Delivery Market Opportunity

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Source: TechCrunch

The company’s ability to stake a strong competitive position in all these verticals will be a function of its ability to leverage its core strengths: innovation and simplicity. While it is relatively early to handicap its success, we believe the company has all the pieces in place to capture a significant market share in these verticals.

Exit on the Horizon

Square’s IPO or M&A will be sooner rather than later

We believe Square’s exit in the form of an acquisition or an initial public offering (IPO) is highly likely sooner rather than later. The company has long been rumored to be an acquisition candidate for Google and Apple but none of that has come to fruition. In 2014, there was a talk of an IPO but that did not happen either, and understandably so, given the many moving parts within the company and less-than-enthusiastic IPO sentiment for consumer facing private companies – particularly for an unprofitable payments company. We believe the company has regrouped in the last 12 months with a clearer path to profitability, and lower probability of execution hiccups. An IPO in the next 12 to 15 months cannot be ruled out, in our opinion.

Square is also attractive acquisition target given its strong user base, brand name, and a wide range of value-added merchant services. Building a wide base of loyal micro merchants takes time. Additionally, Square’s integrated value-added services such as invoicing, inventory management, appointments, web storefronts, cash lending, and other related services provide strong “stickiness” for merchants to remain loyal and stay within the company’s ecosystem.

Accordingly, we believe a number of companies would be interested in acquiring Square. Chief among them includes major credit card networks (Visa is an early investor in Square), a financial institution such as Citibank (Citibank is also an early investor in Square), and payment processors exploring opportunities to expand their presence in the small business market. While the list of potential acquirers is large, we can make a strong case for Visa and Amazon to acquire Square.

Figure 4: Square – Potential Acquirers

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Source: Manhattan Venture Research

Acquisition Scenario 1: Visa + Square

For Visa, the acquisition will give the company access to innovations taking place in mobile payments, particularly in the micro and small merchant segment of the market. According to one Visa senior executive, there are close to 20 million merchants who do not accept credit cards and are therefore not a direct part of their network. Visa would rather have these merchants open direct accounts with them than go through merchant aggregators such as Square. Barring that access, acquiring Square would bring them instant access to its seven million merchants, and the expertise to attract more merchants. Additionally, Visa was an early investor in Square and roughly two-thirds of transactions using Square’s payments service flow through Visa credit cards.

Acquisition Scenario 2: Amazon + Square

In 2013, Amazon entered the mobile merchant payment services market by acquiring the engineering staff and the technology of GoPago. Amazon sold GoPago’s point-of-sale payment processing business to DoubleBeam. Following the acquisition, the company introduced Amazon Local Register, its own merchant aggregation and mobile payment service for small merchants. The Local Register, much like Square, offers a free card reader and POS application integrated solutions with a rate plan after the initial sign-up. Amazon’s product, however, does not include the value-added merchant services that Square does. While Square can assist its clients with an online storefront, CRM, marketing, inventory management, and several bookkeeping functions, Amazon only provides basic services like online sales reporting, inventory tracking, and digital receipts option.

Amazon may have multiple reasons to acquire Square. The most fundamental motivations would relate to Square’s wide range of products and more than seven million strong customer base. As a relatively new player in the already-crowded industry, Amazon seeks a stronger audience. Thus, Square’s value-added features coupled with Amazon’s brand may play a major role in Amazon’s growth in this industry. Furthermore, the potential deal could be mutually beneficial for both companies if Amazon uses its international presence in more than ten global marketplaces and its reach in over sixty countries to expand Square’s geographic footprint beyond the U.S., Canada, and Japan, its existing markets. While the international market would allow Square to compete with companies like iZettle and Klarna, it would enable Amazon to cross-sell and increase traffic on its website. Currently, Amazon offers its merchants the facility to immediately use the money generated from a transaction to make purchases on Amazon.com. If Amazon were to extend this service to Square’s customer base and eventually on a global scale, it could increase revenues for the firm.

Untapped International Opportunity

According to Gartner, in 2013, the volume of mobile payments around the world grew 44% to $235 billion. Square is currently operating in only three countries – United States, Canada, and Japan. International expansion presents a compelling growth opportunity for Square. That said, international markets, particularly Europe, have their own set of challenges. In Europe, the biggest challenge Square must grapple with is the difference in how customers pay for goods online. Credit card use in Germany, for example, is one of the lowest anywhere in the European Union, despite the country’s position as the continent’s strongest economy. Many Europeans also rely on so-called chip-and-pin credit and debit cards to make transactions, which involve punching in a personal identification number instead of signing for a purchase. Square is getting ready to launch its chip-and-pin card reader, thereby eliminating the chip-and-pin hurdle.

Stripe’s international expansion can be a good blueprint for Square to follow. The company moved into several European countries in 2013, including Britain and Germany, and currently accepts payments in more than 130 currencies. Square has the potential to replicate Stripe’s success, in our opinion.

Investment Concerns

Highly Competitive Landscape

Square operates in a highly competitive marketplace. The company’s core POS mobile payments offering enjoyed a first-mover advantage for a number of years. Today the space is crowded with more than 80 companies offering card readers similar to Square’s – some cheaper with more options. Online retailers Amazon, Etsy, Groupon and others started offering mobile credit card readers to small companies, joining the likes of Square, PayPal, and Intuit. The moat around the business vanished gradually.

We believe that the entry of a global payment company using the same technology as Square would hurt business meaningfully. A company like Visa or MasterCard could develop the same service and technology and charge users the same interchange fee they charge Square. This would essentially cut out the middleman (Square) from the process. This is something that we believe poses the most serious threat to the company; however, we believe this is unlikely. Much more likely is the prospect of an acquisition of Square by a leading company in the space.

In an effort to set itself apart from the competition and to be the most attractive payment reader with the most elegant usability model to offer to businesses, Square has diversified into other businesses. Its recent acquisition of Caviar illustrates the competitive and commoditized card reader space and its recognition for the need to innovate.

Execution Risk

Jack Dorsey has assumed the interim CEO position at Twitter following the departure of Dick Costolo.  Will the distraction of running a $22 billion company distract Jack from running Square at a time when it needs his full-time attention? While we believe Square has the management bench to handle the operations, Jack’s divided attention might prove to a negative factor.

Square is at a critical juncture in its business life cycle. Strong product and business leadership isn’t just an option but an absolute necessity for its survival.  After a few missteps and lost opportunities, the company diversified from its core transaction processing business to provide services to small- and medium-sized businesses, a move that has created additional revenue streams. It now offers a whole host of services including cash advances, peer-to-peer payments, booking services, disputed purchase protection, analytics and marketing tools, and instant deposits for merchants through its Register app. The company recently introduced new hardware that will accept mobile payments from iOS and Android devices. The company’s data efforts and risk analysis have also been a product focus. Accordingly, we believe the company needs strong and proactive leadership and Dorsey’s visionary leadership will be critical.

Profitability Still Elusive

Square already operates under very thin margins, and these margins could shrink further if the company needs to make unreasonably high, but necessary, investments in its new initiatives and/or processing fees are capped across the board. Additionally, merchant aggregators like Square have been impacted by the revised set of network fees from Visa that took effect on April 1, 2015. Depending on the size and number of aggregators’ sponsored merchants, the revisions could significantly boost actual fee payments as well as drive up programming and administrative costs.

Another threat to Square’s business is the possibility of further price wars between competitors. Square has already dropped their fixed $0.15 fee on every transaction to have an advantage on Intuit, who promptly dropped theirs. Square cannot afford to continue to cut fees because of the interchange cost they incur from the global payment companies. The lower its prices, the more transactions it must pool to make a profit. The more transactions it pools before processing, the longer it will make its customers wait to receive payments.

New Regulatory Regime

Recent regulations relating to payment processing could have a material impact on the payments industry. The Dodd-Frank Wall Street Reform and Consumer Protection Act lowered retailers’ costs in two ways. First, it capped the interchange fee on debit cards—effective October 1, 2011—to 21 cents plus 0.05% of the transaction value. The fee can be adjusted upward by a penny if the issuer of the debit card meets the fraud prevention standards. The imposed limit applies only to issuer institutions that have assets of more than $10 billion.

Second, the act enabled the merchants to offer incentives to customers to encourage them to use one mode of payment over another. In the past, payment card networks could impose a limit on the merchant, restraining him or her from offering discounts to customers for using modes of payment such as cash or debit card. Such discounts dissuade the use of credit cards, which generate more money for the networks. Under the new rule, the payment card network can no longer stop the merchant from giving those discounts or incentives to customers, as long as that offering is clearly shared with all customers. Although this rule does not prevent the payment card networks from using similar restrictions, it enables merchants to cut costs and increase their own earnings.

Europe, too, has followed suit. In March 2015, European Parliament capped the interchange fees for debit cards to 0.2% and credit cards to 0.3%. The limit does not apply to third-party networks like American Express and commercial cards used to pay business expenses.

Valuation

We peg Square’s fair value at $6.4 billion or $17.19 per share. Our valuation is based on the mean revenue multiple of 4.8 times the consensus 2015 revenue estimates of comparable companies and means take-out multiple of 7.2 times trailing 12-month revenues of relevant companies in the payments hardware/software space. The implied blended valuation of $6.5 billion compares favorably with Square’s last post-money valuation of $5.3 billion, or $15.46 per share, in October 2014 when the company raised $150 million. We believe there is room for valuation upside if the company can generate higher than expected transaction volume in the payments business and gain good traction in its new initiatives.

The following chart summarizes our blended valuation. This is followed by a detailed description of the two methodologies used in the implied valuation.

Figure 5: Valuation Summary

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Source: Manhattan Venture Partners

Below is a brief description of the two valuation methodologies:

I.  Valuation Based on Comparative Revenue Multiples

Square’s comparative public market valuation is based on a basket of point-of-sale terminal manufacturers or payment processors, companies in the delivery business and a company focused on small business lending. We believe this basket is representative of Square’s current businesses. Accordingly, the average EV/Revenue multiple is 4.8 times, which implies an enterprise value of $5.68 billion, or $15.17/share, based on our 2015 revenue estimate of $1.17 billion.

Figure 6: Comparative Public Market Multiples

picture1Notes:

(1) Stock prices as of June 19, 2015 market close.

(2) Intuit fiscal year ends in July; revenue estimates are approximate consensus calendar estimates.

(3) Verifone fiscal year ends in October; revenue estimates are approximate consensus calendar estimates.

(4) Mitek fiscal year ends in September; revenue estimates are approximate consensus calendar estimates.

(5) Ingenico trades in Paris; Euro FX rate applied = 1.14; Merrill Lynch 2015-16 revenue estimates.

(6) Includes actual 340.5 million shares outstanding & 10% option pool.

Source: Yahoo Finance, Thomson Reuters, Manhattan Venture Partners

II.  Valuation Based on Relevant M&A Multiples in the Payments Space

We believe the mean M&A transaction multiples is a good indicator of implied valuation of Square. We looked at a cross-section of transactions in the payments space in the last five years, starting with Visa’s acquisition of CyberSource in 2010 and leading up to PayPal’s acquisition of Paydiant in March 2015. Accordingly, the mean take-out multiples in our sample of a transaction are 7.2 times trailing revenues. This implies a valuation of $7.19 billion for Square, or $19.20 per share, on trailing 12-month revenues of $1.00 billion.

Figure 7: Relevant M&A Multiples in the Payments Space

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Source: Company reports, Thomson Reuters, Manhattan Venture Research

Square – Post-Money Valuations: Series A to Series G

Square completed six equity rounds including the first one in December 2009. The company’s post-money valuation increased from $47 million in 2009 to $5.27 billion in October 2014, which was the last round (Series E) completed in October 2014. The following figures show the implied post-money valuation at each funding round.

Figure 8: Square Post-Money Valuations

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Source: VC Experts, Manhattan Venture Research

 

Company Introduction

Square launched as a mobile payments aggregator and a processor for small merchants. The company expanded its offerings to financial services, and consumer services such as food delivery, e-commerce, and other related services. The original inspiration behind Square emerged when Jack Dorsey’s friend in St. Louis was unable to complete a $1,000 sale because he could not accept credit cards. Today, the company employs over 800 people and has offices in San Francisco, New York, St. Louis, and Kitchener-Waterloo. Originally created with a cap of 50,000 users in May 2010, Square has now amassed over seven million users.

Square markets several software and hardware products and services, including Square Register and Square Reader, its core products. Square Register allows individuals and merchants in the United States, Canada, and Japan to accept offline debit and credit cards on their iOS or Android smartphone or tablet computer. The app supports manually entering the card details or swiping the card through the Square Reader, a small plastic device, which plugs into the audio jack of a supported smartphone or tablet and reads the magnetic stripe. On the iPad version of the Square Register app, the interface resembles a traditional cash register.

Besides its card reader and register app, Square offers a wide range of products and services that make it a one-stop shop solution for many small businesses. Most recently, the company added payroll services to its list of offerings. While the new service is only available in California, Square plans to launch it in other states as well.

Revenue Model

Square’s net revenue is a function of processing fee and interchange charges. Below we highlight the key aspects of both these charges.

  • Processing Fee: Whenever a transaction is completed using the Square application, there is a fee that is charged to the account accepting the payment. The fee is contingent on the way the payment is processed. If the payment is processed by swiping a card through the reader, charges equal to 2.75% of the total transaction apply. If the card numbers are entered manually into the software application, the fee jumps to 3.5% + $0.15 per transaction. Prior to February 2011, Square’s fee for swiping credit and debit cards was 2.75% + $0.15. They dropped the extra $0.15 in order to make the service more attractive to smaller businesses and individuals. Only businesses are presently allowed to use the app version of Square. Small transactions users, enterprise or individuals, are not able to afford the expensive cost of a merchant agreement with MasterCard or Visa. The purchase and installation of a terminal are impractical and preventatively expensive for smaller or mobile sellers.

Other than small businesses, Square also appeals to individuals looking to make personal transactions. An example of a personal transaction would be to use the device to pay a friend money you may owe or accept a payment on an item you may have sold through a website.

  • Interchange Fee (Cost of Transactional Revenue). For every transaction that Square facilitates, it is charged fees by the established networks that process the transaction. In processing a transaction, Square is acting as a middleman between the user and a global payments company (i.e., Visa, MasterCard, etc.). As a result, Square is subject to interchange fees charged by the payment processor. These fees vary by company, transaction amount, and with the reward program associated with the card. In a typical business transaction using the card reader, interchange fees generally range between 1.41% + $0.08 and 1.91% + $0.15 per transaction. There is also a per transaction fee $0.02-$0.04 that Square incurs to process the transaction. Merchants could pay these interchange fees directly if they choose to install terminals and sign a contract. Square’s per transaction fee is roughly 1% greater than the average interchange fee. Small businesses, mobile businesses, and individuals would rather pay the greater percentage per transaction to avoid upfront costs and mobility limitations. This is why Square is desirable for small businesses. Larger commercial businesses do not find Square’s fee structure. For larger and less mobile businesses, Square’s fees generally make the device cost increasing. Apple seems to be the exception to this rule. Square is widely used in Apple stores to process payments. Although we do not have the details, we are confident that the arrangement between Apple and Square does not involve the usual fee structure discussed in this report.

Pooling Transactions

Square is subject to a percentage and fixed fee on every transaction. Since Square’s niche is for small businesses with low transaction amounts, it is difficult for them to be profitable on transactions. Square, however, has the option of pooling multiple transactions into larger transactions before processing with Visa or MasterCard. When pooling occurs, Square will only be subject to one fixed fee charge, decreasing costs dramatically. The practice is very common for companies that need to process small transactions. Apple and PayPal are two examples of public companies that currently do this. This is why you sometimes do not receive your Apple iTunes bill for a couple of days after the purchase. We expect to see Square take advantage of this and implement this strategy going forward.

Below, we illustrate the difference in profitability by pooling transactions vs. processing them with the global payments companies as they occur.

Figure 9: Pooling Transactions vs. Processing as They Occur

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Source: Manhattan Venture Research

The table in Figure 8 depicts what we believe is key for Square to be profitable in a small transaction environment. The greater the transaction amount, the greater profit Square realizes. This is due to the fact that the $0.08 or $0.15 (+$0.03) becomes a less relevant percentage of the transaction as the prices increase.

The data above shows a 365% difference in revenue realized, even when the dollar amount processed is the same. This difference becomes exponentially greater as transactions are pooled. We find this to be one of the very few ways to be profitable with these types of transactions.

Competitive Landscape

This industry is large, but can be broadly segmented into two categories: one focused on consumers and the other on merchants. Square falls on the merchant side of the industry. In 2013, the company tried its hand on the consumer side with the launch of Square Wallet, a digital wallet. The application allowed consumers to make virtual payments merely through their names with existing accounts with partner stores. The application was not well-received by either the merchants or the consumers. In May 2014, Square Wallet was recalled from Apple and Google app stores and discontinued.

Square competes with POS terminal manufacturers and merchant payment aggregators/processors.  Below is a summary of leading competitors in the two categories:

Figure 10: Competitive Landscape

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Source: Manhattan Venture Research

Point-of-Sale (POS) Terminal Landscape

Point-of-sale terminals are channels through which merchants facilitate transactions. These terminals allow merchants to accept payments from remote locations. Although not a major segment of the business, Square does compete in this landscape. Square Register competes with terminals from four major players in the business—VeriFone, Ingenico, NCR, and Mitek. Companies like VeriFone and Square have synchronized their terminal with an inventory management function through their tie-up with Stitch, a Saas-based platform. Yet, VeriFone remains a major threat to Square given that it is used in 80% of top 200 retailers in the U.S. Further, VeriFone’s international presence surpasses that of Square’s.

Merchant Service Providers

Merchant service providers include companies that aggregate payments. Square’s initial success in the micro-merchant payment aggregator business has prompted others to enter the market, resulting in greater competition and segmentation. While the big leaders include PayPal and Intuit, the new cluster of players consists of LevelUp, Flint and Amazon Local Register to name a few. Although each company hopes to make headway in the market, it offers the same core services as the other—mobile POS application integration, card reader, and aggressive rate plans. With low barriers to entry, new merchant aggregators capitalize on the clarity of their packages and ability to maintain liquidity for their merchant clients.

In the past, two particular setbacks, especially for Square, have been the retention of funds for an extensive time due to fraud monitoring practices and poor customer service. Since these merchant aggregators offer more privacy, they need greater fraud deterring model, the outgrowth of which is potential for illiquidity for small businesses.

The following figure is a comparative analysis of Square’s products and service features. We compared the features of Square’s closest competitors: PayPal Here, Intuit GoPayment, Amazon Local Register, Flint, and Stripe.

Figure 11: Comparative Product Features

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Source: Company websites, Manhattan Venture Research

Square is unique in offering both traditional swipe-based mobile payments and newer application-based mobile payments. This allows Square to have one foot in the old and one in the new; however, it increases the firm’s cost of operation and the number of competitors. Square Reader, when plugged into the audio jack of an Android, iPhone, or specific tablets and iPads, allows merchants to accept credit card payments. It accepts signatures on a touch screen, sends e-mail or text receipts, calculates sales tax, and connects to multiple software that allows accounting, marketing, and custom relationship management.

Square charges 2.75% on each credit or debit card swipe and 3.50% plus $0.15 for transaction cost on manually entered numbers. Alternatively, merchants can enlist in the $275/month flat-fee plan, which covers the transaction fees for all transactions smaller than $400, up to $21,000 per month. The flat fee package would be cost-effective if a merchant’s dollar amount transactions fall in the $10,000 to $21,000 per month range.

Square has joined hands with bigger merchants like Uniqlo Co. and Whole Foods Markets Inc. to increase revenues. Recently, Square announced its partnership with Apple’s Apple Pay. The partnership would enable consumers to use the NFC chip in their iPhones to make contactless payments on the Square Reader device. It will likely strengthen Square’s business, especially in light of the proliferation of iPhones globally.

A few dominant players and Square’s closest competitors are described below:

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Amazon purchased GoPago and reintroduced it as Amazon Local Register, a credit-card reader that processes transactions through smartphone or tablet. Local Register resembles Square, PayPal Here, and GoPayment in function. Launched in 2014, it offered 1.75% fee charge to anyone who signed up for the service before October 31 of the same year. The scheme expires at the end of 2015, after which rates will hike to 2.5% for each transaction. Unlike Square, Amazon charges a $10 sign-up fee for the card reader. The money a merchant earns from the transactions can be deposited in his or her bank account in one business day or alternatively, immediately spent on Amazon.com. The service comes with an application that enables merchants to create reports, track inventory, and examine sales trends.

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Groupon entered the payment aggregation market by combining its already existing POS system, Breadcrumb Payments, with an application. While it shares its core characteristics with Square and other competitors, it distinguishes itself on the basis of cost. Breadcrumb Payment charges 1.99% plus $0.15 on each transaction, but the rate may only be fixed for merchants who run “Daily Deals” with Groupon. The card reader itself costs $15. In an attempt to ease the sign-up cost pressure, Groupon recently launched an introductory offer that waives transaction fees on the first $5,000 worth of transactions. Merchants can also upgrade to Breadcrumb PRO for $99. Competitive in its overall design, Groupon’s system is primarily designed for restaurant owners and its rate plan is more cost effective than Square’s if a merchant’s transaction exceeds the $16 amount.

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Flint Mobile is one of the new players in the market. Like most of its competitors, it targets micro-merchants and provides value-added features such as online real-time tracking, invoicing features, customization options, and merchant choice accounting or ERP systems. In addition, it brands itself through unique social media marketing and loyalty programs integration. Merchants willing to install the service do not need a swiper; the app enables the merchants to scan the credit cards through the phone or tablet’s camera. The firm charges 1.95% for all debit card transaction and 2.95% for all credit ones.

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Once merchants create an account on Intuit, they receive GoPayment free card reader. The regular swipe fee is 2.40% with an additional $0.25 in transactions costs. For high-volume customers, there exists a $19.95 monthly plan that gives merchants a 0.65% discount on swiped and keyed transactions. This makes Intuit more expensive for transactions greater than $60. In 2012, Intuit launched a program where it combined its traditional POS software with its GoPayment app to link financial data with inventory. QuickBooks POS allows businesses to track customers and inventory from remote locations and formulate analytical reports. The payment aggregator appeals to both small and large merchants. The GoPayment reader and application is compatible with the iPhone, iPad, iPod Touch, Android, and BlackBerry.

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In 2010, Merchant Focus Processing and Inner Fence acquired Swipe, a creation of AppNinjas Holdings, Inc, integrating their respective products. The new product processes payments on a single screen captures consumer’s signatures and generates an e-mail customizable receipt confirming the transaction. In addition, it offers a glance at the past transactions and enables merchants to refund or void payments. It charges 2.9% fee plus $0.30 on each transaction under a $39 or $49 monthly plan. Its cost structure is supported by a unique distinction—rather than creating one account for all its users, Inner Fence creates individual merchant accounts through Authorize.net gateways for all its users to provide higher quality service.

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iZettle is a five-year-old Swedish company that offers similar services as Square. Although it does not compete with Square’s market in the U.S., it may imminently become a competitor if Square were to seek expansion abroad. iZettle has established its presence in eleven countries, including the UK, France, Germany, Brazil, and Mexico. The firm offers two readers—one that works with chip and PIN cards and the other with chip and signature cards. Card readers may fall in the price range from $32 to $93. Merchants processing monthly transactions of more than £12,850 pay 1.50% on each swipe while those processing less than £2,000 pay 2.75%. With multiple staff accounts, inventory library, bookkeeping procedures, and superior pricing and security, this application seems more relevant than Square’s, at least in the international market. Having acquired £70 million in funding and multiple endorsements, iZettle is competitively better positioned.  The company recently launched Pro Contactless, which is a device that lets consumers pay with Apple Pay, Google Wallet, Paywave, Paypass, regular credit cards, and cash. The service began in the UK on June 1 for £79 and will be extended to other countries.

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iZettle is a five-year-old Swedish company that offers similar services as Square. Although it does not compete with Square’s market in the U.S., it may imminently become a competitor if Square were to seek expansion abroad. iZettle has established its presence in eleven countries, including the UK, France, Germany, Brazil, and Mexico. The firm offers two readers—one that works with chip and PIN cards and the other with chip and signature cards. Card readers may fall in the price range from $32 to $93. Merchants processing monthly transactions of more than £12,850 pay 1.50% on each swipe while those processing less than £2,000 pay 2.75%. With multiple staff accounts, inventory library, bookkeeping procedures, and superior pricing and security, this application seems more relevant than Square’s, at least in the international market. Having acquired £70 million in funding and multiple endorsements, iZettle is competitively better positioned.  The company recently launched Pro Contactless, which is a device that lets consumers pay with Apple Pay, Google Wallet, Paywave, Paypass, regular credit cards, and cash. The service began in the UK on June 1 for £79 and will be extended to other countries.

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iZettle is a five-year-old Swedish company that offers similar services as Square. Although it does not compete with Square’s market in the U.S., it may imminently become a competitor if Square were to seek expansion abroad. iZettle has established its presence in eleven countries, including the UK, France, Germany, Brazil, and Mexico. The firm offers two readers—one that works with chip and PIN cards and the other with chip and signature cards. Card readers may fall in the price range from $32 to $93. Merchants processing monthly transactions of more than £12,850 pay 1.50% on each swipe while those processing less than £2,000 pay 2.75%. With multiple staff accounts, inventory library, bookkeeping procedures, and superior pricing and security, this application seems more relevant than Square’s, at least in the international market. Having acquired £70 million in funding and multiple endorsements, iZettle is competitively better positioned.  The company recently launched Pro Contactless, which is a device that lets consumers pay with Apple Pay, Google Wallet, Paywave, Paypass, regular credit cards, and cash. The service began in the UK on June 1 for £79 and will be extended to other countries.

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eBay’s PayPal began processing payments through the Internet over a decade ago. PayPal Here’s service costs merchants 2.70% on each credit or debit card swipe and 3.50% + $0.15 on each manually entered card number. It enables merchants to accept checks (though the service puts a five-day hold on the check amount to ensure secure transactions). In addition, it offers inventory management, online reporting, digital receipts, and fast money deposits into an individual’s PayPal account. Today, 157 million consumers and merchants use PayPal.

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Ingenico’s recent acquisition, ROAMpay, utilizes the ROAMplay X app for mobile transactions. ROAMpay X5 is a part of Ingenico Mobile Solutions that works to provide full-fledged encryption along with support for magnetic stripe, EMV, and NFC transactions and option for recording sales in various currencies for global merchants. In 2013, Visa announced that it would promote ROAMpay as a mobile payment platform, shaping the road of ROAMpay’s expansion to Visa credit card users. MasterCard, too, lent its approval, signaling ROAMpay’s success in the years to come. In addition, its compatibility with Blackberry, Android, and Apple gives it a broader market. Merchants can also keep track of their account in real time, thanks to the website access included in the service. Over 100,000 merchants rely on ROAMpay for their business transactions.

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VeriFone launched Sail, a mobile card reader, to compete with the growing popularity of Square. Within a year, it sold the business unit to Capital One, which subsequently updated the product and branded it as Spark Pay. Capital One charges 2.7% on each transaction (and 3.70% for American Express transactions) for small businesses. Alternatively, merchants can choose the monthly plan, which costs $9.95 and 1.95% per transactions (and 2.95% for manually keyed transactions). Sail, like Square, uses Stitch for inventory management. Spark Pay is attempting to further distinguish itself from its competitors by using advanced back-end technology like application program interfaces to link third-party platforms like Facebook, Twitter, and Yelp.

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With a valuation of $3.57 billion, rumors for extensive funding, and operations in 20 countries worldwide, Stripe has emerged as a major competitor in the market. The infrastructure provides, however, is fit to maintain web-based mobile payment system rather than an in-store or in-person system. The firm charges 2.9% fee on each swipe with an additional $0.30 to cover transaction costs on first $80,000 per month. As transaction volume increases, the fee decreases. In addition to its competitive pricing, it offers great customer service. Stripe partners with firms of all sizes. Their portfolio of clients includes well-known firms the likes of Kickstarter, Twitter, Instacart, Shopify, Pinterest, and Lyft. Last year, Apple and Stripe announced a joint venture to implement Apple Pay, using Stripe’s expertise in mobile payments application as leverage. The deal can prove to be particularly beneficial for Stripe as more merchants seek out mobile payments reader options. Stripe has also added a feature to aggregate and convert over hundred global currencies, giving mobility a greater meaning in the international landscape for a 2% additional fee. In the upcoming years, Stripe will work together with Facebook and Twitter to handle the back-end work on each social media platform’s buy options.

Products & Services

Besides its card reader and register app, Square offers a wide range of products and services that make it a one-stop shop solution for many small businesses. Recently, it entered the payroll services to its list of offerings. While the new service is only available in California, Square plans to launch it in other states as well. Below is the list of all products that Square currently provides.

Figure 12: Square Product Portfolio

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Source: Square

 

Funding

Since its inception in 2009, Square has raised $594.5 million, including $494.5 million in equity and $100 million in debt financing. The company’s last round of $150 million was completed in October 2014 at a post-money valuation of $5.3 billion, or $15.46 per share. Notable investors in various rounds included Khosla Ventures, Kleiner Perkins, Sequoia Capital, Marissa Mayers, Rizvi Traverse, Goldman Sachs, Government of Singapore, Visa International and Citi Ventures, among others.

Figure 13: Square Funding Rounds

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Source: SEC Filings, VC Experts

 

Financials

Revenue Projection

We expect sequential growth in the total payment volume (or “TPV”) that is processed on its platform. According to our model, Square excited 2014 with $29.5 billion (+48% Y/Y) in transaction volume and $831 million (+52% Y/Y) in revenues. Looking ahead, we expect payment volume to grow to $41.7 billion (+41% Y/Y) in 2015 and $52.7 billion (+27% Y/Y) in 2016.

Figure 14: Square Transaction Volume ($B)

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Accordingly, based on the take-rates between 2.71% and 2.81%, we expect the company to post revenues of $1.2 billion (+40% Y/Y) and $1.49 billion (+23% Y/Y) in 2015 and 2016, respectively.

Source: Company reports, Manhattan Venture Research estimates

Figure 15: Square Revenue ($Mil)

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Source: Company reports, Manhattan Venture Research estimates

Costs, Expenses, Profitability, and Scalability

In our view, there are two broad buckets of cost items that Square faces: payments to credit card companies and operating costs in the form of selling, general, and administrative expenses. We believe the company will find it difficult to scale against payment processing expenses, and rather view Square’s long-term profitability potential to be contingent on its ability to grow revenue at a higher rate than the SG&A cost ramp.

  • Payment Processing Expenses. The payments to credit card companies represent a fundamental scalability issue. For each dollar processed on Square’s platform, a fixed portion of Square’s 2.75% fee must effectively be passed through to credit card partners. As TPV scales, the portion of revenues that must be passed through to credit card companies is unlikely to meaningfully change. We estimate that the cost of processing payments on Square’s platform, which includes the direct fees to credit card companies as well as certain additional processing costs, totals approximately 1.5%-2.5% of total payment volume. We have assumed an average cost of 2% of TPV in our forward forecasts.
  • SG&A Expenses. We have modeled improving operating leverage in the business model. We believe the company exited 2014 with SG&A expenses accounting for 34.5% of total revenues. We expect a 50 basis points improvement in total SG&A as a percentage of total revenues in 2015 and the following two years.
  • Earnings Before Income Taxes (EBIT). We expect the company to turn EBIT positive in late-2016 on the back of higher revenue and improving operating leverage. For 2015, we expect EBIT loss of $64.3 million before a positive EBIT of $7.4 million in 2016 and $76.1 million in 2017.

Figure 16: Square EBIT: 2013-2016E

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Source: Manhattan Venture Research

 

Management Team

Jack Dorsey, Co-Founder, CEO 

Jack Dorsey, born in St. Louis, Missouri, may be best known for also being a Co-Founder and ex-CEO of Twitter. In 2000, before co-founding Twitter and Square, Dorsey started a company that dispatched couriers, taxis, and emergency services from the Internet. Along with being the current CEO of Square, Dorsey is currently the Head of Product Development at Twitter. Dorsey attended Missouri University of Science and Technology before transferring to New York University.  He dropped out of New York University before graduating and after conceiving the idea for Twitter.

Jim McKelvey, Co-Founder, Director

Jim McKelvey, another St. Louis native, had knowledge of computer science engineering well before he connected with Jack Dorsey in late 2008. Besides Square, McKelvey founded Cultivation Capital in 2012, a venture capital firm focused on technology and life sciences companies.  Additionally, the Square co-founder also co-founded LaunchCode, a non-profit job placement organization that connects job seekers with non-traditional technology backgrounds with employment opportunities.

Sarah Friar, Chief Financial Officer

Square Inc’s Chief Financial Officer joined the company in July of 2012. Sarah Friar is the former Senior Vice President of Finance and Strategy for salesforce.com. Prior to Salesforce, Friar was a Managing Director and Senior software analyst in the Business Unit for Technology at Goldman Sachs. Ms. Friar studied Economics and Management at the University of Oxford before receiving her MBA from Stanford University.

Kevin Burke, Head of Customer Acquisition

Kevin Burke was hired by Square in December 2014 to lead Square’s various customer acquisition efforts. Previously, Mr. Burke was Visa’s head of global marketing and strategy and the senior vice president of advertising.  Prior to Square, Burke had over 20 years of marketing communication experienced with well-established companies like Amazon.com, American Express, AT&T, Chevron, and Microsoft.

Gokul Rajaram, Product Engineering Lead

Gokul Rajaram is Product Engineering Lead at Square. He oversees Square Register, the point-of-sale system that the startup designed for small and medium businesses to use from tablets and smartphones. Previously he was Product Director, Ads at Facebook.

Emerging Private Payment Companies

The mobile payment ecosystem is vast with a number of private companies operating in niche markets. We have identified seven emerging companies that present promising investment opportunities and need to be on the radar of pre-IPO investors.

Figure 17: Emerging Private Companies

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Source: Company websites, VC Experts, Manhattan Venture Research

 

Model

Figure 18: Square – Consolidated Income Statement ($Mil)

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Source: Manhattan Venture Research

 

Appendix

Appendix 1: Enabling Mobile Payment Technologies

Most mobile payment technologies are designed to turn the mobile phone into a virtual wallet, capable of authenticating users, accessing data, delivering bills, presenting customers with options, and actually executing payments. The following is a snapshot of some of the key technologies that turn mobile phones into payment machines.

  • NFC: Near Field Communication, a wireless communication standard that can transmit consumer and transaction data over short distances between handsets and payment terminals is used in most mobile payment pilots.

Figure 19: NFC Reader

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  • MicroSD: MicroSD memory cards are inserted into a phone and typically host a prepaid account. The cards cost about $15, hold more memory than payment stickers, and are attractive because they can download apps.

Figure 20: MicroSD Card

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  • Barcode: Barcode is an alternative to NFC, since the technology is already available on the iPhone and iPad Touch, and it has proven successful as a mobile payments enabler at Starbucks. However, most industry experts believe that barcode’s use case is limited to larger retailers, and most trials are moving in the direction of NFC because NFC can support a wider range of payment functions.

Figure 21: Barcode Image

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Source: worldbarcodes.com

  • Fingerprint sensor. Apple first introduced TouchID in its iPhone 5s and 5c. It is a unique new fingerprint sensor, which allows a simple touch of a finger to unlock the phone or to make purchases from the App Store and the iTunes and iBooks retail sites.

Figure 22: TouchID

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Source: Apple

  • SIM cards: A big part of securing NFC payments, SIM (“subscriber identity modules”) cards place a circuit onto phone cards that store a key used for authentication purposes. All mobile carriers that use 4G LTE use SIM cards.

Figure 23: Advanced SIM Card

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Source: tmonews.com

  • Intelligent Routing: Intelligent routing refers to the cloud-based controls that route payments to funding services. The desired benefit is to broaden the source of payments. For example, to execute mobile payments, Verizon’s digital payments partnership with Payfone guides transactions to the proper funding source either the consumer’s phone bill or bank account-based on the consumer’s mobile phone number and funding preference. For instance, if you’re on the way to a train station, you can go to Amtrak.com, see the schedule, then you push your phone number and click on ‘Verizon Bill’, and it goes to the process of checking out, or if the funding source is a Chase account, then the user can select the bank account option.
  • Ultrasound: One of the latest alternatives to NFC is a downloadable app from Narette called Zoosh, which allows contactless payments to be executed on any mobile phone, tablet, POS terminal, PC, or television regardless of whether or not those devices are NFC enabled. It’s also one of the most interesting alternatives since it enables mobile payments without forcing phones or terminals to be upgraded. The carrot here is the lack of a chip or card that’s inserted into the device transactions are executed by holding a Zoosh-phone close to a reader or another phone. An ultrasonic pitch is produced that contains an encoded IT token that allows a consumer to make a payment after the token is recognized. Zoosh is relatively new, as it just became available in July-and Narette is a small firm, with only about a dozen employees.
  • GPS: Mobile handset’s positioning function is used to deliver real-time loyalty perks by card providers and others. Google, for instance, has made GPS part of its Wallet product, and card companies match coupons to customers’ locations inside a retailer.

Figure 24: GPS for Mobile Payments

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Source: technalaya.com

  • Cloud-based mobile payments: Google, PayPal, GlobalPay, and GoPago use a cloud-based approach to in-store mobile payment. The cloud-based approach places the mobile payment provider in the middle of the transaction, which involves two separate steps. First, a cloud-linked payment method is selected and payment is authorized via NFC or an alternative method. During this step, the payment provider automatically covers the cost of the purchase with issuer linked funds. Second, in a separate transaction, the payment provider charges the purchaser’s selected, cloud-linked account in a card-not-present environment to recoup its losses on the first transaction.

 

Appendix 2: Ease of Registration

As mentioned throughout this report, one of the most appealing aspects for Square users is the ease of registration. In less than 10 minutes, an individual or business can set up a Square account. Within five business days, the user will receive the actual one-inch-square device. As shown below, the process is simple.

Account setup begins the moment a prospective user lands on squareup.com. The basic terms are spelled out at that time as well. To get started, all the user has to do is enter an email address and create/confirm a password. The user will then receive an email asking them to claim their Square for verification purposes.

Figure 25: Screenshot of Square’s Initial Registration Page

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Source: Square

The next step is to provide a mailing address to receive your device. After entering a proper address, the user will be asked how the device will be used. Options include individual use, apparel, accounting services, art/photo/film, catering, charitable organizations, computer services, web development/design, food truck/cart, legal services, taxi/limo, tourism, music/entertainment, and several others. A business name and federal (U.S.) tax identification number (if available) can then be added. The screen also asks for general information (as seen in the figure below) before agreeing to the terms of user and the E-sign user agreement.

Figure 26: Step 2 in Process of Registration

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Source: Square

Users will be asked to verify their identity, which is linked to information that is pulled from a social media-based algorithm.

Figure 27: Sample Questions for Identification Verification

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Source: Square

After answering three simple, personal questions, the user will be sent to the banking portion of the registration. The user will receive an email confirming the bank routing number and checking account number on the account.

Figure 28: Bank Information for Deposits

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Source: Square

By the time the user spends 10 minutes registering for an account, a screen will appear congratulating the new user and telling them they may now receive credit card payments. The user will also be asked to enter the mobile number for the handset that will be used for the Square to operate. The user will then receive a text message welcoming them to Square.

Figure 29: Square Congratulatory Screen

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Source: Square

 

About Manhattan Venture Partners

Our Research Methodology

Manhattan Venture Partners provides clients with accurate, timely and innovative research into the companies and sectors we cover. To that end we have established an experienced team of analysts, researchers, economists and industry veterans that focus exclusively on private companies with a proven track record of success. Producing quality research on a private company is uniquely challenging. Our analysts communicate with employees, ex-employees, early investors, VCs, competitors, suppliers and others to gather valuable information about the company under coverage. This information enables us to create unique financial models that value the underlying company and provide insight to our clients and industry experts, leveraging years of experience working for bulge bracket firms.

Manhattan Venture Partners reports include business and financial aspects of late-stage companies. These reports include but are not limited to industry overviews, competitor analyses, SWOT analysis, products (existing and in development), management and key directors, risks and concerns, other propriety channels, historical financials, revenue projections, valuations (using various matrices and valuation recommendation), waterfall analysis, and a capitalization table.

About the Analysts

Santosh Rao

Santosh Rao has over 18 years of experience in equity research, primarily within the technology and telecommunications space. He started his equity research career at Prudential Securities and later served as a Vice President and Senior Equity Analyst at Broadpoint Capital (Broadpoint Gleacher), where he specialized in the telecommunications equipment and services sectors. Prior to joining Manhattan Venture Partners, he was Managing Director and Head of Research at Greencrest Capital, focusing on private market TMT research, and prior to that at Evercore Partners’ Institutional Equities Group, focusing on telecom and data services companies. Mr. Rao started his career as a Financial Analyst at PaineWebber (UBS) and later at Prudential Securities in the Financial Analysis & Reporting Group. Santosh earned his Bachelor of Arts in Economics and Accounting from Rutgers University and an MBA in Finance from Rutgers Graduate Business School.

Max Wolff

Max Wolff is an economist specializing in international finance and macroeconomics. Before joining Manhattan Venture Partners, he was Chief Economist at Greencrest Capital, and prior to that spent four years as the senior hedge fund analyst at the Beryl Consulting Group LLC. Mr. Wolff teaches finance and statistical research methods in the New School University’s Graduate Program in International Affairs. Max’s financial markets and Macro-Economics work appears regularly in Seeking Alpha, The WSJ, Reuters, Bloomberg, The BBC, Russia Today TV, and Al Jazeera English.

Disclaimer

I, Santosh Rao, certify that the views expressed in this report accurately reflect my personal views about the subject, securities, instruments, or issuers, and that no part of my compensation was, is, or will be directly or indirectly related to the specific views or recommendations contained herein.

I, Max Wolff, certify that the views expressed in this report accurately reflect my personal views about the subject, securities, instruments, or issuers, and that no part of my compensation was, is, or will be directly or indirectly related to the specific views or recommendations contained herein.

Manhattan Venture Partners LLC (Hereafter “Manhattan Venture Partners”), the parent company of Manhattan Venture Research, does and seeks to do business with companies covered in this research report. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. This document does not contain all the information needed to make an investment decision, including but not limited to, the risks and costs.

Additional information is available upon request. Information has been obtained from sources believed to be reliable but Manhattan Venture Partners or its affiliates and/or subsidiaries do not warrant its completeness or accuracy. All pricing information for the securities discussed is derived from public information, unless otherwise stated. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. Manhattan Venture Partners does not engage in any proprietary trading.  The user is responsible for verifying the accuracy of the data received.  This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Manhattan Venture Partners does not have ownership of the subject company’s securities. Manhattan Venture Partners does not have any market making activities in the subject company’s securities. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. The recipient of this report must make its own independent decisions regarding any securities or financial instruments mentioned herein. Periodic updates may be provided on companies/industries based on company specific developments or announcements, market conditions or any other publicly available information.

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Each research report is classified into one of three categories depending on its classification. The categories are:

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