Formerly red hot payments company Square is now in the payday-loans-for-small-business space, to the tune of $100 million. This is a troubling development that does not bode well for the company. We learned today that the company has issued over 20,000 payday style loans to small businesses who use its payment processing system. This is not a good sign for the once promising company.
There are 3 key reasons why Square is now in trouble.
(1.) Durable competitive advantage is obtained by focusing on narrow markets and dominating them. By getting into an adjacent market Square loses focus and makes it much harder for itself to gain competitive advantage in the payments space. The effects of this will be felt in both margins and market share in the coming months / years.
(2.) Square open itself to a host of issues by issuing high risk loans to small businesses, chief amongst them default. Businesses have plenty of avenues for credit already. Those that do not have credit are likely too risky to deserve it. Square is inexperienced in lending and is likely being too generous. A larger issue is the potential for accounting malfeasance this introduces. What was previously a relatively simple business is now complicated by the valuation of receivables issued to low quality borrowers. This makes valuing the company very difficult
(3.) Jack Dorsey is a celebrity CEO who has a track record of failing to deliver. Both these characteristics should give investors cause for concern. Strategic CEOs are capable of juggling both the vision of the business and the operational details to deliver results. Dorsey seems incapable of doing both yet notoriously stretches himself thin.
These factors, combined with huge players like Apple getting into the payment space paint a bleak picture for Square going forward.