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Sunday, September 20, 2020 9:29:41 PM
By: Motley Fool | September 20, 2020
• Square's increasing integration between its seller and consumer ecosystems.
Square (NYSE:SQ) recently introduced two new services tied to its Payroll product. On-Demand Pay allows Square merchant employees to take a cash advance of up to $200 with no fee. Instant Payments allows sellers to fund their payroll from their Square Seller account, speeding up the transaction.
Both services take advantage of the growing number of consumers using Cash App, offering greater access to cash for both employers and employees. The interplay between Square's consumer and seller ecosystem is a significant competitive advantage for the company that should drive continued adoption of its products and services.
Connecting the two ecosystems
Square CFO Amrita Ahuja described the three horizons for growing Square's dual ecosystems at an investors conference last year. The first horizon is scaling the individual ecosystem, second is cross-selling services within each ecosystem, and finally connecting the ecosystem. Ahuja pointed out it won't tackle each one linearly, but accomplishing the goals of earlier horizons will make later horizons easier.
On-Demand Pay and Instant Payments clearly fit into the third horizon. Employers may encourage employees to set up a Cash App account to accept their payroll in order to reduce cash flow constraints. Instead of it taking days to process payments for a Friday payday, employers using Instant Payment could wait until the end of the day on Friday in some cases.
For the employees, they can access their pay sooner through Cash App. Since Square can see the amount each employee is due, it can safely offer cash advances through the app. It'll charge a 1% fee if a user wants the cash transferred to another account.
These are services Square's ecosystems allow it to offer with less risk and cost than practically any competitor. That's an example of how it can disrupt the old way of handling something like payroll. As the two ecosystems grow, Square may find other areas where it can create value between them.
Trickle-down effects
While connecting the two ecosystems is the long-term goal for Square, making moves like Instant Payment and On-Demand Pay now will prove valuable for Square's earlier goals of scaling Cash App and seller services and cross-selling more products within each ecosystem.
Instead of charging standard fees for same-day deposits or cash advances, Square will use them to scale its products with minimal costs. The new services ought to improve adoption for Payroll among merchants, while boosting Cash App adoption and the direct-deposit feature in particular.
Both services ought to produce increased balances in seller and Cash App accounts. That should increase the appeal of other Square services like the Square Card or Cash Card. It could also lead to more Cash App users investing or sending cash to friends.
"We see that direct deposit customers are some of the most engaged on the Cash App and typically carrying much higher balances and using more products across the ecosystem," CEO Jack Dorsey said during Square's second-quarter earnings call. "The Cash Card customers who use direct deposits spend two to three times more than any other card actives."
It would make sense that greater balances in seller accounts would produce similar results on the seller side. And as Square merchants use more than one service from the company, Square can start offering even better value to sellers.
As Square increases the adoption of Cash App and its various services across the two ecosystems, it'll open more opportunities to connect the two. That may include things like loyalty programs, lending products, or other ways to facilitate commerce. Square is just getting started, but the fintech company's new Payroll products show the potential to create significant change in the small business financial services industry and grab market share.
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