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New B2B Debit Card From Square Almost Completes the Puzzle

James Brumley

Roughly a week ago, payments middleman Square (NYSE:SQ) launched a debit card designed specifically for merchants who are already using its platform. SQ stock jumped on the news, and understandably so. Backed by Mastercard (NYSE:MA), the card gives small businesses immediate access to funds that they might otherwise have to wait days to use.

The marketability of the card is clear. Even if it can only be used by Square’s current customers, certainly most of them will be interested in the offer; waiting for funds to clear can hurt small businesses over time.

But the new Square Card’s real strength lies in the fact that it’s a piece of a puzzle for SQ stock that’s not yet complete, but soon could be.

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Square Card Will Be an Easy Sell

Square Card is another shot at Square’s rival, Paypal Holdings (NASDAQ:PYPL), which has taken similar — though not identical — initiatives. With Square Card, Square’s customers will be able to immediately access the payments made to them. without paying a fee. Prior to the launch of Square Card, merchants could immediately access payments made to them, but they had to pay a 1% fee to do so.

Moreover, Square merchants who use their Square Cards to buy goods and services from other Square merchants will receive a 2.75% rebate on those purchases.

In simplest terms, the payments company is developing its own ecosystem…. one that Nomura Instinet analyst Dan Dolev believes plugs the company into a total addressable market of $50 billion. Dolev, however, thinks that Square Card will only increase Square’s revenue by $2 million to $7 million within the next couple of years.

More than that, though, adding another feature to the list of benefits offered to merchants will certainly inspire more companies to consider using Square’s services. Over time, the card should help Square increase its customer base, ultimately raising Square’s bottom line and boosting SQ stock.

But that’s not the only reason that the current and would-be owners of Square stock should celebrate Square Card.

Another Piece of the Puzzle

Square Card is a debit card that effectively allows merchants to bypass traditional banks. But the debut of the new product may only be a stepping stone to SQ becoming a full-blown bank.

If the idea sounds familiar to longtime fans of SQ stock, there’s a reason for that. SQ filed paperwork to become a true bank, with insured deposits, in September 2017. Square was aiming to become a government-approved bank primarily because it wanted to provide loans and credit that small businesses generally aren’t able to get from their local banks.

SQ withdrew that application in July of last year, but the idea never really went away, and in December of last year, Square refiled the application.

If the application is approved — and there’s no clear reason it wouldn’t be — Square will become a one-stop solution for merchants, allowing Square’s customers to avoid dealing with conventional, local banks altogether.

The Bottom Line on SQ Stock

Although Square already facilitates loans, it only does so by referring customers to Utah-based Celtic Bank.

But facilitating loans is not a big business for Square. Securing its own bank charter would allow SQ itself to become a lender, which is a more profitable role. With more potential earnings on the table, Square would certainly more intensively market its loans. And, since two million merchants are already using Square to accept customer payments, SQ has two million potential customers to whom it can easily market its loans.

All of Square’s customers would likely understand the benefit of having real-time access to payments via a debit card.

The valuation of SQ stock certainly isn’t low, but there’s more than enough growth in store to keep the long-term rally of Square stock going.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.

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