In a bid to diversify in a crowded market, Square, an American financial services and digital payments company, announced in August that it intended to acquire Afterpay, an Australian firm that specializes in buy-now-pay-later solutions.

By Chen LiuSpecial to the Star

Sat., Nov. 20, 20213 min. read

Square acquires Afterpay in August

If you’ve made a purchase at a boutique shop recently, chances are your credit card payment was processed by Square, an American financial services and digital payments company that touts itself as affordable for sellers.

In August, the company announced it intended to acquire Afterpay, in a deal with an implied value of $29 billion (U.S.). Afterpay is an Australian firm that specializes in buy-now-pay-later solutions whereby purchases made by customers are divided into four payments, paid every two weeks.

In its third-quarter fiscal 2021 results ended Sept. 30, Square reported revenues of $3.8 billion, up from $3 billion the previous year. The company reported a net loss of $2.9 million for the quarter, compared to a $36.5-million gain in 2020 driven by a $365-million increase in operating expenses year over year.

Andreas Park, a professor of finance at the University of Toronto, researches the intersection of technological transformation and financial markets. He notes that competition is stiff in the payment processing industry, which has necessitated diversification.

“(The companies) try to build a suite of options to tap into various payment methods. They also try to provide services in addition to payment. For example, Square does more than just credit card payment processing; it also has an internal system that allows (merchants) to know how many products they sold and when they sold them,” Park said.

While information on customers can be beneficial in many ways, Park cautions that data on consumer spending, in the wrong hands, could have serious consequences. “If you know how people spend their money, you could predict (a lot of things). I find that quite terrifying as there is a possibility for manipulation.”

Nuvei acquires Simplex in May

Although Square’s market capitalization is more than six times that of Nuvei’s, the later company has made a name for itself in the payment processing industry. In May, Nuvei announced it would acquire Simplex, a payment solution provider to the cryptocurrency industry. Cryptocurrency is based on blockchain technology, which is a decentralized, digital ledger maintained across several computers linked in a network.

Nuvei announced it would pay $250 million (U.S.) in cash for the company. In 2020, Simplex processed $500 million of total volume and is expected to process more than $2 billion of total volume in 2021.

In its third-quarter fiscal 2021 results, ended Sept. 30, Nuvei reported total revenues of $184 million, up from $94 million the prior year. Overall net income for the quarter increased to $28 million, from a $78 million loss in 2020.

Park’s recent research has explored the impact of blockchain technology on finance. While blockchain technology is the foundation of cryptocurrency, there are concerns with using it for payment processing. “Privacy in the blockchain is a tricky topic because on the blockchain transactions are private in the sense that they are pseudo-anonymous, but they are (also) transparent in the sense that you can see where digital assets are flowing. Every transaction is linked to a public address. If you were to find out who is behind (these addresses), privacy would then be nil,” said Park.

As for the assumption that blockchain technology is inherently discreet, Park says “the idea that everything that happens on the blockchain is anonymous, untraceable and hidden away from corporations is nonsense. There is a huge degree of traceability.”

Bottom line

With a market capitalization of $107 billion (U.S.), Square is a dominant player in the payment processing industry. The company is also behind Cash App, a mobile payment service that allows peer-to-peer transfers, bitcoin purchase and sale as well as stock trading. Nuvei, through its acquisition of Simplex, gives its users a greater choice of cryptocurrency to buy and sell, but is less invested in peer-to-peer payment solutions than Square. Given the growth of the cryptocurrency market over the past decade, Nuvei is well-positioned to capitalize on people who want to convert their fiat currency to cryptocurrency in the future. It’s a thumbs-up for Nuvei this week.

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