Why Square Is My Top Growth Stock

I think the most bullish case for Square (NYSE:SQ) is that it will ultimately be a central company in our digital financial world. If it can build a digital wallet and payment network so large that it can compete with big banks and credit card companies, it could disrupt a lot of what we take for granted about finances today. And that transformation may be taking place sooner than expected. 

This week, Square announced that it has added automated clearing house (ACH) transfers to its invoices, adding a low-cost way for businesses to request money from their customers. And if this is the tip of the iceberg for changes to payment methods, it could be very disruptive to financial stocks across the industry. 

Bakery with Square Reader on the counter.

Image source: Square.

Why ACH is a big deal

Credit card fees are a huge, but necessary, expense for nearly every business. Whether you’re a retailer, restaurant, or gym, companies like Square are eating up as much as 3% of revenue before you start paying operating expenses. 

A recently announced addition of ACH transfers on invoices will allow Square customers to reduce fees even further. Instead of nearly 3%, ACH transfers will only have a 1% fee. 

Source: Square. 

The benefit is clear if you’re a customer. A 1.6% reduction in fees at the low end would save a company with $1 million in revenue $16,000 per year. And for restaurants and retailers that operate with tight margins, those cost savings are a big deal. 

For Square, ACH transfers aren’t actually a big reduction in the company’s net revenue per transaction. A credit card fee includes interchange and assessment fees that go to credit card issuing banks and card companies like Visa (NYSE:V) and Mastercard (NYSE:MA), which makes up about two-thirds of the card fee. Square only keeps about 1% of the transaction anyway. 

In time, the addition of ACH transfers in the Square ecosystem could lower fees for businesses and potentially increase margins for Square at the same time. And that’s where having a bank to process payments and a network of businesses and consumers is a huge advantage for Square. 

Square is punching above its weight

It may seem like taking on big banks and payment processors like Visa and Mastercard is a heavy lift for Square, but the company has a huge advantage in the market: It’s the payment processor for businesses. 

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Credit card companies ultimately rely on companies like Square to accept their payments, and then customers to carry their cards. If Square is offering a lower-cost payment method to businesses and a payment method like the Cash App that millions of people have in their pockets, it’s a win-win for businesses and consumers. There’s nothing credit card companies or big banks can do to fight back outside of dramatically lowering fees. And you can see above that they would have to cut fees dramatically to match Square’s ACH fee. 

Being the point of contact for businesses through the Square App and consumers with the Cash App puts Square in a power position. And that gives it more power to disrupt the payment industry than you might expect . 

Square’s growth plan is emerging

If Square can build a big enough ecosystem of businesses and consumers, it can essentially cut out the banks and credit card companies that have always been middlemen in the payment infrastructure. The fact that Square is already doing that within invoices could be foreshadowing what’s to come for payments within the Square app. 

Having an ecosystem of finance products for both businesses and consumers, including a bank, is proving to be a great growth business for Square. And that’s why this is a stock I’m very bullish on over the next decade. 

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

View more information: https://www.fool.com/investing/2021/04/18/why-square-is-my-top-growth-stock/

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