Square's Pricey Bet Pays Off as Merchants Pick NFC, EMV Readers

The tough move from free to fee for its readers has Square adjusting its strategy to lure merchants, but it also opens the door wider to new markets, according to CEO Jack Dorsey.

"It's a global platform and we can look more globally in getting sellers in new markets," said Dorsey during Wednesday evening's second quarter earnings conference call.

Dorsey did not provide investors with specifics on sales of its new mobile card reader, but did report anecdotal examples of growth, such as the Coachella music festival, where contactless "tap" payments  increased to 11% from 1% the year before. In other reports, Square this spring claimed hundreds of thousands of sales of its NFC/EMV reader since last fall.

Square's business was originally built on free hardware, but the complexity of EMV and Near Field Communication-based mobile payments has led the company to charge for its newest readers. To expedite sales, Square recently offered to accept installment payments of $1 per week for 60 weeks for its $49 NFC/EMV reader. Square had earlier offered a lower cost EMV reader without NFC, though that was seen as a tougher sell.

"We're really pleased with the momentum of contactless and chip card readers and are surprised by its scale," Dorsey said. "We're seeing it being purchased from smaller sellers who use it in mobile environments, such as farmers, up to multi-location merchants with countertop solutions."

Square has also managed to avoid some of the slow processing times for chip card payments by providing information on chip cards and mobile payments, and by encouraging contactless mobile payments over contact EMV payments, which consumers perceive as taking longer than traditional magnetic stripe payments. That difference has led Mastercard and Visa to introduce software to speed up chip card payments.

Square has not seen widespread user problems with EMV payments, Dorsey said. "We're making sure we educate sellers and also buyers on what you can do with the readers," Dorsey said.

Square also reported growth of its Square Capital loan program, adding it is benefiting from a recent change in the program to structure its lending as loans as opposed to cash advances. The company extended $189 million in the quarter, a 123% expansion over the prior year. "Square Capital's competitive ventures continue to attract additional investors to purchase our own products," Dorsey said.

For the quarter ending June 30, Square recorded a loss of $27 million, or 8 cents per share, compared to a loss of about $30 million in the prior year, or $0.20 per share. Thomson analysts predicted the company would lose 11 cents per share. Square reported net revenue of $439 million, up 41% from the prior year's $310 million, and better than Thomson analysts' prediction of $406 million.

Gross payment volume in the second quarter increased 42% to $12.5 billion. Square raised its full year adjusted revenue projections of $655 million to $670 million, up 6% from the midpoint of the company's previously stated range.

"We're continuing to innovate so sellers can run their business and get paid quickly and easily," Dorsey said.