The COVID-19 crisis is pushing people in the U.S. to increasingly choose debit cards over credit cards, and that trend could benefit Square Inc., according to an analyst.
Susquehanna Financial Group analyst James Friedman is encouraged by recent data points disclosed by Mastercard Inc.
and Visa Inc.
around the growing usage of debit cards as the pandemic prompts people to opt for more conservative payment options.
Visa disclosed in early September that overall U.S. payment volume was up 7% in August, led by a 24% increase in debit volume as credit volume fell 8%. Friedman noted that Mastercard saw U.S. debit volumes exceed credit volumes for the first time in the June quarter, while Visa saw its widest spread to date between the two payment types then.
A growing preference for debit spending could be a positive development for Square
he said, since the company doesn’t offer merchants varied transaction pricing based on the type of payment mechanism a consumer uses. This means that Square could see its own transaction costs fall amid the increased debit-card spending, since the interchange fees the company incurs on debit transactions are much lower than for credit transactions, and Square’s fee structure means that these reduced costs aren’t passed through to merchants.
Friedman calculates a 15% boost to Square’s gross profits, as he increased his target price on the stock to $195 from $180 and reiterated a positive rating.
He’s also upbeat about Square’s consumer-facing Cash App business, even though the third quarter didn’t see new economic-impact payments from the government. These payments were a big engagement driver for Square at the beginning of the pandemic.
“Although Square Cash is likely off its stimulus-driven highs, the suggestion it’s still growing faster than its pre-Covid levels implies to us it’s here to stay,” Friedman wrote.
Shares of Square finished up 6.7% to $180.92 on Monday.
Square has been the subject of numerous upbeat calls lately, including from Wolfe Research analyst Darrin Peller, who upgraded the stock to outperform from peer perform last week. “Square continues to demonstrate its tech differentiation through share gains at the physical [point of sale] and more impressively, online (recently 25% of [gross payment volume], growing 50% year over year), which has stabilized GPV trends faster than most,” he wrote.
Additionally, analyst Max Friedrich at Ark Invest argued in a Sept. 30 report that Square could be worth $375 a share in 2025. He sees room for the company to add more revenue-generating features to its Cash App, which could allow Square to monetize its most engaged users more at the rate that traditional banks do, while also improving monetization of its broader user base.
Square shares have gained 59% over the past three months as the S&P 500
has risen 8.4%.