Square Partners With SAP: What Investors Need to Know

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In Square Inc.'s (NYSE: SQ) second-quarter conference call, CEO Jack Dorsey promised that the company was constantly looking for ways it could "accelerate and deepen" its offerings to its customers. One of the ways the company has recently focused on in order to accomplish this goal is to embed its payment processing into existing business software platforms through partnerships. Earlier this quarter, Square partnered with Eventbrite, the popular live event-planning platform. More recently, Square announced another partnership, this time with SAP SE (NYSE: SAP), the German-based enterprise application software provider.

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Under the terms of the deal, announced on Square's corporate blog, Square's payment processing and financial services will now be integrated with SAP's Business One platform. SAP Business One is a software platform that provides small and medium-sized retailers with a variety of back-office business services, including accounting, project management, and human resources. With the integration of the two companies' services, businesses will now be able to view their sales and payment data with "one holistic view."

The sales page of the combined services also boasts that customers will have access to real-time business data analytics, the capability to manage a business from multiple locations, and, of course, the ability to accept many different types of payments at the point of sale, including Apple Pay and chip cards.

What this means for Square and SAP investors

For Square, the deal represents yet another way the company can gain access to new payment-processing customers before introducing them to Square's entire ecosystem of products, including Square Capital and Caviar. It is through its robust ecosystem that Square has been able to maintain an impressive take rate of 2.94% and grow its business so fast: Last quarter, Square reported adjusted revenue growth of 41% and gross payment volume growth of 32%. In the conference call following the earnings release, transcribed by S&P Global Market Intelligence, Dorsey touted Square's ability to work across many different platforms from different companies and affirmed that the company would continue to look for more opportunities by doing so:

[W]e are a network that can bring multiple financial institutions together, multiple platforms together, and make it feel for the seller that there's really no distinction. They don't have to think about any of that complexity, and we can do all that work for them. ... We're always looking for teams and for products that can help accelerate and deepen our offering to our customers, both sellers and individuals. And we have a very healthy approach to looking at the market and asking questions and big questions about what we could do and what could make Square grow faster and really continue to get deeper into our sellers day to day.

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For SAP, a company with a much larger market cap of nearly $140 billion, the deal will obviously make a less material difference, although it does strengthen the overall sales proposition of SAP Business One. The enterprise business software platform has already seen significant traction, with 55,000 business clients in over 150 different countries. Now that it will be able to seamlessly integrate Square's payment processing into the already-impressive list of services it provides, the overall platform becomes that much more attractive to prospective business clients.

Growth through partnerships, not acquisitions

The payment processing subsector has seen a good deal of consolidation in the past few months alone. This past summer, Global Payments acquired ACTIVE Networks for $1 billion so that it could embed its payment processing capabilities into its event-planning management solutions software. Around the same time, First Data Corp. acquired CardConnect for $750 million to bolster its auxiliary services that it can offer, in addition to its payment processing core capability. By far the biggest acquisition, however, was Vantiv's $10 billion purchase of London-based Worldpay Group.

Not to be outdone, Square has done a good job of integrating itself into two large business platforms, Eventbrite and SAP Business One, without spending a lot of money on an attention-grabbing acquisition -- something that many would consider advisable before a company has yet to show positive GAAP earnings. Both deals were opportunities for Square to grow its core payment processing base before turning the new customers into prospective clients for its other, more lucrative services. It is smart business moves like this that have led Square to its fantastic recent quarterly results and led the stock price to appreciate 150% year to date. With these partnerships just starting, however, I wouldn't bet against more market-beating returns in the near future.

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Matthew Cochrane owns shares of Global Payments and Square. The Motley Fool owns shares of Square. The Motley Fool recommends Global Payments. The Motley Fool has a disclosure policy.