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Could Square Destroy Banks?

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Replacing banks not part of the mission

Square’s (SQ) expansion into financial service areas such as the money transfer and credit businesses has raised questions about whether the company was out to oust banks and payment card networks. Square CEO Jack Dorsey addressed the issue of replacing banks when he spoke at an industry conference organized by JPMorgan (JPM) last month.

According to Dorsey, who is also the CEO of Twitter (TWTR), Square’s mission doesn’t include replacing banks. Instead, Square hopes to partner with banks to make life easier for merchants and consumers.

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Remitting money via email

Through Square Cash, a peer-to-peer platform, people can receive or make payments through email or text. Square Cash also allows users to store their funds for future purchases. Square notes that Square Cash is popular with people shopping on Amazon (AMZN) or paying for digital content on platforms such as Netflix (NFLX) and Spotify. However, funds stored in Square Cash don’t earn interest like they would in a bank savings account.

Bridging the credit gap

Through Square Capital, the company supplies small loans to its merchant customers, thus bridging the credit gap in a market where large banks have tended to shy away from risky credit like small business lending.

Thus, Square sees itself filling a gap rather than replacing banks. Square said its credit business grew 64% year-over-year in 1Q17. The above chart depicts Square Capital’s growth rate.

For Square, it’s important to clarify its agenda to avoid being viewed as exposing itself to too much risk.

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