Square's taking on hundreds of millions of added debt to battle PayPal, indicating that the simple business model of turning a smartphone into a point of sale terminal is largely a thing of the past.
Square and PayPal — which recently shelled out billions to iZettle — have no choice but to diversify. While it was once innovative to bring thousands of small businesses out of the cash wilderness by creating a high-tech alternative to bulky cash registers, the movement soon sparked a demand for omnichannel commerce that relies on far more complex technology.
When iZettle, often called the Square of Europe, sold to PayPal for $2.2 billion, it did so because it needed PayPal's broad merchant acquiring tools to compete—while PayPal plugged holes of its own in geography and brick-and-mortar technology. Square's responding with a $750 million raise, some of which will go toward expanding its own products.
Square's transaction volume is on the rise, but so are its development and marketing costs. Some of the debt financing will likely go toward acquisitions of smaller fintechs that operate outside of the direct payments technology space.
Square has already made several acquisitions to serve this need. It acquired portions of Zesty to shore up its position in the corporate catering business and expand its Caviar and Square Order mobile delivery businesses. In another deal, Square acquired Weebly to offer web design for businesses. And Square's most recent product launches include Square for Restaurants, an integrated point of sale system that bears almost no resemblance to the small, square card swiper that gave the company its name.
Companies like Square and iZettle have long looked beyond their hardware roots for additional income streams—iZettle, for example, comes with its own equivalent of Weebly. But as micromerchants move online, even iZettle's own executives are predicting the mPOS market doesn’t have much of a future. Square did not return a request for comment by early Tuesday afternoon.
If mPOS becomes obsolete, that leaves mobile point of sale systems without a core product, and puts them in direct competition for merchant acceptance with the traditional payment processing giants they have spent years trying to avoid. In this market, differentiation becomes a heavier lift, so some of these deals, such as PayPal's iZettle acquisition, will include market real estate in addition to product diversification.
Visa and Mastercard are pushing a "single button" through EMVCo to standardize card not present transactions, and Alibaba affiliate Ant Financial is raising $10 billion, also with an eye on multi-channel acceptance.
"The battle for payment acceptance is just beginning," said Tim Sloane, vice president of payments innovation and director of the emerging technologies advisory service at Mercator.
Square and iZettle are no longer battling each other in this game, but instead are competing with mobile wallets, API providers, international acquirers and other fintechs.
"Any winner will need to have an expanded acceptance footprint," Sloane said. "This acceptance land grab is why PayPal acquired iZettle…of course without a war chest the battle will be lost and I expect that's what's behind Square's debt offering."
And while payments hardware may be fading as a competitive differentiator, the best opportunity for mobile point of sale companies should still reside with smaller merchants.
"Larger clients tend to work with mainline processors, and once the relationships are established, it’s difficult to unseat them," said Thad Peterson a senior analyst at Aite Group. "Adding point of sale functionality for PayPal and Square is an opportunity to generate incremental revenue with value added services. Processing is becoming increasingly commoditized so companies need to find new ways to generate revenue."