How Square Makes Money

Square, Inc has grown from a scrappy payments startup to a $26 billion FinTech giant. Square shares soaring on Thursday. I love this stock. It’s Square SQ the payment technology company that can turn any smartphone or tablet into a credit card reader. Not bad for something that started off as a side project for Twitter inventor Jack Dorsey. We’re building a tool for small businesses that actually rivals and is much better than what most big businesses have. Square credits its success to a mission of economic empowerment, giving business owners an ecosystem of tools to seamlessly accept payments and finance growth. We have designed a beautiful experience for our buyers and sellers that has really set us apart in the industry. But critics wonder if it’s overvalued and getting distracted from its core business as it faces fierce competition on all sides. This is clearly broken. It’s like the trend is not there. Still way too expensive. More downside to go. We are steering clear of this one. So how does Square make its money and can its growth spurt last? The company’s beginnings are said to trace back to a St. Louis area glassblowing studio in 2009. Jim McKelvey owned the studio and like many small business owners around the country, he faced a daily dilemma of whether or not to accept credit cards. He could use a complex structure of exorbitant fees to run any kind of card or only accept some forms of payment and watch a chunk of his customers walk out the door. A computer scientist and economist by training McKelvey figured there had to be a way to create an affordable and simple card processing system for small business owners like him. And lucky for McKelvey. He happened to have an old friend who could help him make that happen, Jack Dorsey. Dorsey and McKelvey realized that almost everything you needed to run a card already lived inside a relatively new and increasingly popular invention, the iPhone. Computer chip, network connection, TouchPad for signing… the only thing missing, a card reader. So the two got to work building a little square shaped reader capable of plugging into a headphone jack. That square reader became the company’s namesake being released to the public in 2010. Square would send out the reader for free. Then, like most other card processing companies, Square took a cut of every swipe 2.75% plus 0.15. But that was it. Unlike other processors, Square did away with complex contracts and additional fees. And soon it even dropped the one extra fee it did have, that 0.15 on top of every transaction. By early 2011, the company was reportedly shipping 50,000 readers and processing $66 million in payment volume. We sat down with Square’s hardware lead, Jesse Dorogusker, to learn more about the company’s design ethos. At the very beginning, we were really just trying to build the simplest thing we could for as many people as possible. A free piece of hardware that was very simple, plugged into the smartphone you already have, download a free app, get started in five minutes. Suddenly that housecleaner, dog groomer, farmers market vendor, cash only takeout restaurant or even cookie selling Girl Scout troop could all swipe credit cards. But then something interesting started happening. Sellers who could afford to pay standard card processors started using Square. Checking out on a sleek Apple product became trendier in many ways than using a standard card reader. By 2013, the company said it was processing $15 billion per year. We’re not just for small businesses. We can’t be a company that says, hey, we only serve small businesses because that means as soon as they grow, which is part of our mission to help them do, then they would grow out of us and we’d have to point them somewhere else. We’re going to make sure that they see us all the way along the path. And as they go from 10 locations to 20 locations or from a coffee cart to the size of a Starbucks, we can handle both extremes. Square started to realize it had the ability to compete in these larger payment processing business, creating an ecosystem of hardware and software products businesses could pay extra to take advantage of. There was Square stand which could replace a register, a suite of software products to help manage things like payroll, and even small business loans. Building off that momentum, Dorsey took the company public in 2015. An important day for tech as Square, the mobile payments company, goes public at the Big Board. CEO Jack Dorsey is due to ring the NYSE opening bell. But ringing the opening bell with his mother, Marsha Dorsey. Not a bad Twitter follow in her own right. 3.7 million shares of Square open at $11.20. That’s a very good price. I mean, it’s all about getting the business of accelerating the business. And that’s what we came here to do today. And we did it. But after the billion dollar company went public, its share price started faltering, dipping below its IPO price three times in less than a year. Analysts began questioning whether Dorsey could run two major companies. It requires a full time CEO. I know Jack’s being stretched and pulled in different directions with these two firms. Jack’s an incredible product thinker, an incredible person, but I think it’s hard to see both companies going through the cultural change as public companies while his time is split. New trendy payments companies like Toast and Clover started pushing into Square’s core market. Then Square reported worse than expected losses. I read a lot of analysts notes who think they just have no path to profitability like ever. But Jesse says Square has always been able to offer something its competitors struggle to replicate. What’s really powerful about building an ecosystem top to bottom, the hardware the software that runs on the hardware, the iOS and Android apps and all the backend systems is that you can really observe how they all work together. Our competitors in this space are much more siloed. And in retrospect, the stock did rebound. A big part of that rebound came from growth in a part of Square’s business a lot of people don’t even know exist, Square Capital. While Square is not a bank, it partners with financial institutions to offer loans to many of its small business sellers. Jackie Reese, head of Square Capital, sat down with us to explain how a payments processor got into the loans business. We started lending years ago after listening to our sellers talk about their biggest pain points. What Square says they discovered is that a ton of these sellers just couldn’t get access to capital from traditional banks. Our biggest competition is competing with friends and family. It’s not going to a bank because banks don’t even come close to offering loan sizes that are in the scale that we offer at Square Capital. Sixty five hundred dollars or a five hundred dollar loan or a fifty thousand dollar loan. And so when a small business owner wants to gain access to credit, they have an emergency on a Saturday morning before Square capital they would go ask the parents. They would go ask their sibling, which is in many cases an uncomfortable relationship to be in. Square’s payment ecosystem gave it a unique look inside businesses that most lenders never had. It’s very unusual to have real time data, which can show revenue of a business regardless of how small it is. We can see increases, decreases, number of transactions per day, types of credit cards, day to day business behavior based on the types of transactions that happen in a business. We think that type of granular data is extraordinary in terms of understanding risk. In fact, they say this data is so powerful that they don’t even use credit scores. Instead, they run their own AI based model daily, extending loan offers directly to thousands of businesses via the Square dashboard. Square also developed a different model for getting paid back. Once a seller takes out a loan, they pay it back based on their average daily card swipes. So that if their business grows faster than expected, they pay back more. If their business is a little bit slower, they’re closed for a day, they don’t have the pressure of paying back the loan. To protect themselves from holding all of this risk on their balance sheet, Square also sells off the loans for a lump sum to other companies and then continues to collect a servicing fee from the buyer until the loan is fully repaid. After dipping its total into the market with one point eight billion dollars lent out to more than one hundred and forty thousand businesses, the company announced its intent to go all in with a bank charter application in 2017. It’s a move that could give Square a leg up on an even wider array of tech companies offering small business loans– like PayPal, Amazon and Stripe. Square has also upped its game against other fintech competitors with Cash App. Originally launched in 2013, the Venmo like peer to peer cash transfer app opened a whole new market for Square. Cash that really came out of nowhere. I mean, this was not a meaningful piece of the business two years ago now it’s a quarter of revenues and far outgrowing the rest of the business. Like Venmo, Cash App makes money by charging small fees to link credit cards instead of debit cards and for expedited balance withdrawals. I think the popularity of peer to peer apps is because of the utility that they offer. You can see the structural growth of that market evolving for decades. There’s so much opportunity for banking services across peer to peer apps because they really save consumers a trip to the bank. Square already offers a collection of banking services on the app through its partner banks and has stayed relevant with younger audiences by offering the ability to trade cryptocurrency on the app– a passion project of CEO Jack Dorsey. It does provide an opportunity to give more people access to the financial system. So we’re going to make sure that we are learning and leading here. In 2018, Cash App’s users doubled from 7 million to 15 million and there may be more growth ahead. We would absolutely expect that they’ll start to extend credit on the consumer side through Cash App. Probably fairly soon. It’s a no brainer extension. By late 2018, Square had hit its stride. Its core payments business continued growing. While Cash App’s unexpected resonance wowed investors and the small business loans’ high performance teased a huge new banking market. The success made Square a Wall Street darling. The outperformance here is Square. The stocks had an incredible. Run it up 100 percent year to date. This is a potential $50 to $60 dollar opportunity, pushing the stock high from its post IPO low of just below $9 to $99. But then Square’s future began to look a bit more uncertain. Tough day for Square investors. That stock plummeting. A Square beat down, the stock falling nearly 30 percent since August. Suddenly this former market darling, it has become a complete battleground stock. Some analysts began to wonder if the company had lost focus. Their GPV growth, which is their core volume growth, purchase volumes, the volumes of payments running over their point of sale systems decelerated for the fifth or sixth quarter in a row. And investors are getting very nervous about why that core business, which generates all the profit of the company, is decelerating. Is it because they’re just not investing in sales and marketing sufficiently? Which we think is what’s been happening and now they’re upping the investments and everything would be rosy again? Or actually, is there a deeper problem that that they’re starting to struggle a little bit with growth? This focus issue came front and center when Square sold Caviar, its high end meal delivery service. That market is just fiercely competitive. That business has had dramatically slowing growth over the last year. It’s very unprofitable. It’s very labor intensive because it has all these delivery people. It’s just not anything as attractive as the core business. And so, you know, we’re thrilled they sold it. Some analysts have also begun to worry whether Square can sustain such positive returns on its loans, especially if the U.S. experiences an economic downturn. Square, however, has pushed back hard against this assertion. If there is a downturn, we think we’re incredibly well positioned. Payment processing isn’t discretionary. It’s how people run their business. Second, as it relates to capital. Interestingly, our loans are 9 month duration. So these are very short duration and they can adjust to the way that the payments models adjust literally every day. These concerns have likely contributed to a lagging stock in 2019. Even as other companies like Visa, MasterCard and PayPal hit a rally. Of course, the payments giant has gone through changes and dips in its stock price before. The question now becomes, is Square losing an edge? Or just gearing up for its next big play?

100 comments on “How Square Makes Money”

  1. Dayne Fernandes says:

    How is square better than Google Pay or PayTM? Here in India the business owner can accept our payment without any hardware at all, and neither do we need our debit card to make a payment. The entire payment is done via our phone

  2. indra s says:

    Newer smartphones don't have earphone jacks….

  3. joryboyfpf408 says:

    My App Is 🔛 Next Y'all

  4. Pau Sucro says:

    look at it, square.. the SHAPE OF EVIL!!!

  5. Cassandra M Nance says:

    It doesn't matter how young or old money is. Wow. Even money is segregated.

  6. Terence Jay says:

    The Square small business loans remind me of the micro loans making a huge difference in Africa. Local entrepreneurs giving local businesses a few hundred dollars for basic upgrading and expansion, that the banks won't even look at. It could be as simple as a new delivery bike for the bakers, but multiply that by thousands across a country and it's having a big impact.

  7. Kung Fu Master says:

    If its made in China…… It will be security concern😂

  8. Robo Blue says:

    They sell video games, duh.

  9. Marcus Chan says:

    And then you have wechat pay, alipay and the whole QR code system that a billion over people are using now.

  10. eudofia says:

    How does Square make money?
    By fleecing the merchants that use the platform.

  11. Zachary Joshua Jao says:

    How square makes money. Uses a rectangle monitor, That's how!

  12. Onoff314 says:

    2.75% just for taking payment. It honestly makes no sense that the government doesn't just make a tech solution for payments. Why such a large charge for a transaction which has effectively no cost?

  13. MERCY Sparks says:

    We have been using this mobile payment in China for many years.

  14. Alex Xu says:

    China already has WeChat and Alipay

  15. LeAny says:

    Video recipe online 😊

  16. Veselin.x2 says:

    So … thats why Apple killed the headphone jack ? 😀

  17. Jw K says:

    Heard news, Canadian coffee truck shop uses cuban coffee and square process transation but USA bank does not give money to the business owner because the owner uses cuban coffee.

  18. Richard H says:

    Don't think I've swiped my card since 2004

  19. Raggedy Exynos says:

    Square enix??

  20. maverick lee says:

    All over the world, especially asia. People using e wallet for payment and transfer money. use just the smartphone and QR code. Merchant just display their QR code. no need extra device to complete payment. In US, today…. still using credit card terminal for payment.

  21. Alex A says:


  22. Dalmain J says:

    Damn everybody making money!

  23. MINDS in Motion says:

    Every food truck, fruit stand, and mom and pop business I do business uses square productions. It's smart what they did with the loan incentive and I use cash app daily since they incorporated the boost program

  24. prashant sonuu says:

    Already use in india

  25. Dennis W says:

    My barber uses square

  26. Wyoming83001 says:

    Business micro loans = awesome!

  27. Liz says:

    This is so popular with the hipster spots.

  28. Thomas Polinze says:

    Apple doesn't have a headphone jack anymore lol

  29. brandon h says:

    Not surprised about their stock price. They just changed their rate for their stand drastically from 2.75 flat to 2.6 + .10. For restaurant that has small tickets that’s around 5-7 dollars, their new average rate just increase by 1-2 percent. Time to shop for a POS.

  30. Melqui Carvalho says:

    But the iphone don't have a headphone jack anymore, how about that?

  31. Rad Ranks says:

    But I thought we were moving away from headphone Jacks

  32. Vedansh Koranne says:

    Hello CNBC and everyone who are reading my comment I have question about the company square that do they have to pay some fees also to credit card companies as there card is being swiped if yes then how do they make profit and if no so how is there backend money making works.

  33. Bunne Rabb says:

    Actually, it is a way of making P2P cash transactions less convenient than swiping that card. It lets the IRS track what would normally be cash transactions. Haha.

  34. Raftika says:

    What’s gonna happen when phones no longer have a Jack for headphones? Blue tooth squares I guess 🤷‍♂️

  35. Lil Krisp says:

    Cashapp is the best ❌ 🧢

  36. Great Value says:

    Square steals your money if you sell Cuban coffee.

  37. Phlegethon says:

    Dragging your finger across that disgusting screen

  38. Trevor Phillips says:

    On fees.

  39. Mohammed Nadeem says:

    My dumb brain thought that SQUARE SHAPES are a strategic way to make money -_-

  40. Jorgiño Luis says:

    the fees compare with regular banks are sustainable. great job square!

  41. to cool says:

    I'm not happy with this company bank in the USA .🍋🍋🍋🍋🍋🍋🍋

  42. Matthew Maio says:

    If you are willing to all faith into technology you will lose everytime tech is designed to be hacked and taken over that's why the banks never went to a blockchain technology in 1972 the technology has been around for many years it was never trusted

  43. Chris Lopez says:

    Everyone should just pay in cash, take these big corporations out of the picture

  44. Jeffrey Twoey says:

    What a terrible voice. 🖕🖕🖕

  45. Mohfit says:

    Paypal, Stripe, Square, and the other softwares for businesses will crrash to the floor if they do not lower their 2.7% rates. Needs to be dropped to 0.2-0.5% And if they continue to offer their skyrocket rates on credit.

  46. S M A RAHMAN says:

    What I think is, technology changing with treamoundous pace and in the IT industry, coming very new in the market and surviving with one single key product is not wise ….as private company it's okay and far safer and chance of sustainability is higher …

  47. Kendrick F-D says:

    Side project wtf

  48. RSSS68 Camaro says:

    Anyone see that story about this company stealing $15,000 from that coffee truck lady??

  49. jdareyah says:

    Square Capital sounds like a Merchant Cash Advance to me
    Something that every Merchant Processor Company currently offers.

  50. cientochentasur says:

    Fees. There you go you don’t have to waste your time with this video

  51. Bluecoco says:

    There not as holesom as you think watch this video they scammed a lady

  52. Pe Pi says:

    All this squares make a circle! All this squares make a circle!

  53. Daniel Kirby Ray says:

    Twitter- square really

  54. Octavus5 says:

    Sure, use Square. Then say something politically incorrect and get cut off immediately.

  55. Hans News says:

    No earphone jack anymore

  56. Austin Mills says:

  57. Shihab's Blog says:

    damn I bought it at 69

  58. DDD SSS says:

    Majority Asian countries use QR code for payments, I'm shocked as to y is US still using cards, in India n china u can also get loans with only ur smartphones, about the other asian countries I don't know but India n china can get loans without going to a bank n seeing US still using cards I'm really shocked n it's kind of funny cuz US is a very developed country

  59. otis says:

    the place where this thing would have blown up is a market they largely ignored, lmao

  60. Ranger GamingHD says:

    Hi, can i speak to the person responsible for the credit card processing?

  61. eatfastnoodle says:

    just because you have some data and certain "AI" program doesn't mean you ain't exposed to economic fundamentals, just like having mortgages sliced and bundled into umpteen packages with AAA rating didn't mean there is no risk, nor does it mean there is no contagion. Just look back at how 08 brought Wallstreet to its knees.

  62. MrPland1992 says:

    Don’t forget they scam small business owners.

  63. Jordan says:

    pear phones

  64. Robi Chowdery says:

    I’m self employed guy use square to rent my trade and I love it

  65. lemon says:

    I mean Square is one of the most popular shapes in the shape industry! Maybe only behind the circle, but some believe that the square is the most successful!

  66. Alberto Rodriguez says:

    the first time I heard of square, it was from a news from CBS…
    Coffee vendor out $14,000 after using Square

  67. Ping Wong says:

    Why analysts are dumbasses

  68. Ioanna Maria says:

    Square? Wth never heard of it, lol btw i live in Dubai, UAE so maybe that’s why its probably more popular in canada

  69. Virtual Hidden Bot says:

    Square is good IF IT WAS A ONE TIME PURCHASE

    The fact that they take a percentage of what money you swipe is ABSURD!!!!!!!

  70. shygirl2115 says:

    I want to know why are there cymbals being played in the background. People beware of subtle programming. 🤨

  71. Brandon Lee Sanders says:

    I don’t even accept credit & Debit cards.
    They charge too many fees and I can achieve the same thing with CashApp & Venmo

  72. Michael Hong says:

    So backward…

  73. Aurobindo Ghosh says:

    now hackers can steal data coming from that card reader plugged to smartphone

  74. Shenol Leyton says:

    Pointless tech when cards have chip and pin and small contact readers that connect via an app they are literally making money from the lack of advancement in US card technology this wouldn't work in europe as chip and pin has been standard since like 04

  75. KEVIN says:

    2.75%!!!! Wtf. Amex is 1.5% and Visa/MC is around 1%….. Who would use this crap???

  76. SCARlet_DRaKox13 says:

    How come I have never heard about "square"

  77. Leia Inniss says:

    This is how: haha

  78. Atipat12 says:

    AWESOME 🔥🔥🔥🔥🔥🔥🔥🔥🔥

  79. PIERRE says:

    Damn jack evolved into Gandalf from the success he saw LMAO

  80. John Smith says:

    Y'all are stupid. Have you ever used Cash App? Then you have heard of Square.

  81. John Smith says:

    If there's one way you can destroy this company, it would be to use Instagram Cash. Because who doesn't have Instagram? If they added a feature like this, every company on Instagram would just delete Venmo, CashApp, PayPal, etc.

  82. result! gud says:

    you mean like UPI ? we get that for free!

  83. Jxshua Yuzn says:

    Too bad the headphone jack don't exist no more

  84. Victor Hugo says:

    omg, now we don´t really know if these presenters or journalists are fake or not, since AI can make them 94% accurate or is it 95%, deep fake tech is taking over, over 1% of all videos are now deep fakes and exponentially growing as of today, and I found that I was subscribed to a bunch of channels that I don´t remember subscribing to, maybe I pushed the wrong buttons?

  85. Evin Drews says:

    Square is only getting bigger. None of their competition can compete, it's the nicest payment processor you can buy right now for any small business. It's dead simple too.

  86. Oscar Salvatierra says:

    How they make money? Well they make they make products.

  87. Austin A says:

    They steal money from small coffee shops duh

  88. Alfred Polanco says:


  89. Indian Peanut says:

    willne be like

  90. Ken Lee says:

    Have you heard of alipay?

  91. Juval says:

    iPhone. Headphone jack. Ha ha ha… Ha ha ha…

  92. Vanda Dy says:

    They scammed someone $14000

  93. de132 says:

    Jack Dorsey isn't Twitter's "inventor", he's a co-founder. The idea for Twitter and how it works isn't a new novel concept. It also undermines everyone who worked on the product and its conception to call him the "inventor".

  94. Jordon Hui says:


  95. Buzz says:

    Can't believe how often the card stripe with signature is still used in the USA.
    I haven't used my card stripe in years, just chip and pin/ contactlessly for everything. That's for both my credit and debit card.

  96. Adrian Brent says:

    2%!! That's way too much. Margin are this as it is.

  97. Blissful Fluff says:

    Why is this video made in 2019 and yet they're giving us clips of phones from 2009?

  98. Rohit Rikhi says:

    But then iPhone removed headphone jack cause how can you let other companies earn on your product !!

  99. S A L says:

    Ads on YouTube … that’s how

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