3 Brilliant Ways Square Is Investing in the Future

Square (NYSE: SQ) CEO Jack Dorsey has become an iconic leader in the Bay Area. He's made headlines in recent years as he's been running the social juggernaut Twitter and trying to turn things around there while also hustling across the street (literally) to man the helm at Square. It should come as no surprise that his team at Square doesn't sit still, either. Here are three things Square's leadership team is boldly investing in to pave the way for future growth.

Expanding its ecosystem

The first and most important thing Square is investing in is expanding its ecosystem of products and services. For the company, this is critical for three reasons: It keeps Square one step ahead of the competition, it creates additional revenue streams (with potentially fatter profit margins), and it satisfies the needs and desires of customers. The last point cannot be understated. While Square began its journey working with small sellers by offering an easy-to-use, low cost way to process credit card payments, it has strategically branched off from this core offering to solve other problems for users. It's a classic move for a technology company, or any business: Solve a severe pain point for customers, do it better than anyone else, and find a way to solve the next related problem your customers are having. For investors, this is an enticing development. All the while that Square is expanding its ecosystem -- from point-of-sale services to invoices to financial dashboards -- the company is creating what we call a high switching cost competitive advantage.

Customers, once engaged in Square's ecosystem, find that it's hard to leave. They would have to rejigger their payments workflow too much. The switching costs are too high, and it's a burden. Instead, they stick around. And they build a deeper relationship with Square. Over time, this becomes a durable competitive advantage for Square, which can further extends its lead versus the competition.

Venturing overseas

The second thing that Square is investing in is acquiring customers beyond U.S. borders. This one is more impressive in terms of sheer size than in building a competitive advantage.

At this point, Square is in the first inning of a long ball game. Just 4% of its revenue came from international markets through the nine months ending Sept. 30, 2017. But the market opportunity is tremendous: The number of small businesses abroad is 125 million versus 21 million in the U.S., and the volume of card transactions abroad is $55 trillion versus $10 trillion in the U.S. Thus far, Square has been able to execute effectively abroad because its suite of service offerings is well-rounded. It can acquire a new customer, introduce them to its payments hardware and point-of-sale system, and then rapidly offer more services to suit their needs. This was not possible at the outset in the U.S., of course, because that suite of offerings didn't yet exist. As shown in the company's 2017 investor presentation, US., Canadian, and Japanese customers were on-boarded with only two products, whereas Australian customers could access four and U.K customers were presented with nine at launch.

Envisioning a future in banking

The investment that received the most press in 2017 was Square's application for a bank charter. While that charter has yet to be approved, the move served as a signal that Square had its sights set on offering banking services. The end customer at this point would be its sellers -- businesses small and large -- but I sincerely doubt the company isn't considering expansion into the marketplace for individual loans. This is a relatively small investment in dollar terms: My colleague Daniel Sparks points out that the banking arm, Square Financial Services, would be capitalized with $56 million initially. At this point, Square is offering loans through a different avenue, under Square Capital. In the third quarter of 2017, loan amounts increased by 45% over the same quarter in the prior year, from $178 million to $303 million. The intent to become a bank is there. The track record of lending is there. Now Square needs to see if it can venture into a regulated arena and shake things up. For investors, banking will likely be the story to watch in 2018 as it adds new complexity -- which is the polar opposite of Square's simple gateway products and is dreaded by most tech companies -- but also new opportunity to round out its powerful ecosystem.

3 stories shape the future of Square

These three stories -- a growing ecosystem, international expansion, and the potential addition of a banking arm -- are in their early stages, but they are key points for investors to watch. The company will be reporting fourth-quarter and full-year results on Feb. 27. Information on how to listen in can be found on this page; look under "Events."

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Isaac Pino, CPA has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Twitter. The Motley Fool owns shares of Square. The Motley Fool has a disclosure policy.