Is Square About to Get Into the Tax-Prep Business?

Laveta Brigham

Square (NYSE:SQ) has previously said that it wants its Cash App to offer more financial products and services as time goes on, and tax preparation services would certainly qualify. A recent rumor indicates that Square could be preparing to get into that business very soon, and in this Fool Live video […]

Square (NYSE:SQ) has previously said that it wants its Cash App to offer more financial products and services as time goes on, and tax preparation services would certainly qualify. A recent rumor indicates that Square could be preparing to get into that business very soon, and in this Fool Live video clip from our Nov. 2 Industry Focus show, Fool.com contributor Matt Frankel, CFP and host Jason Moser talk about why Square might want to make this move, and what investors should know. 

Jason Moser: Yes. Well, let’s talk a little bit about another one of our favorite businesses here, Square. We saw last week that there’s potential at least where Credit Karma is in talks to sell its tax preparation business to Square. I think part of this was a deal in order to avoid any antitrust concerns with another dynamic of this deal that doesn’t involve Square. But I don’t know, we were talking about this morning. I don’t if you had a chance to read through. There was an article this weekend on the Wall Street journal that talked about Jack Dorsey, who’s the CEO of Square and Twitter (NYSE: TWTR), and talked at length about his management style and in particularly, he has got a very hands-off management style, which seems to be totally plausible given that he’s running two major multi-billion-dollar corporations. But it does sound like there’s the potential word. Maybe he’s a little bit too hands-off in some cases. I think we could argue that Twitter is maybe not benefiting from close enough eyes on what’s going on there. At what point I mean, with Square, it seems like they’re going in a lot of different directions and I’m not going to say I’m concerned with this at all, but is there a point, should we at least start becoming a little bit concerned with Square appearing to spread itself too thin?

Matt Frankel: Well, first of all, I’m not concerned with Dorsey’s management style at Twitter because I don’t know their style so I said selfishly, I don’t really care.

Jason Moser: Neither do I. That makes two of us.

Matt Frankel: In all seriousness, I think Square’s the higher potential business of the two. So I think that’s where it’s efforts should be focused.

Jason Moser: I agree. Totally.

Matt Frankel: Dorsey’s management style reminds me a lot of Warren Buffett’s, and hear me out here. Warren Buffett has said what we try to do is find the 400 hitters and then not teach them how to swing. That’s kind of what Dorsey does. He hires a rockstar CFO. Sarah Friar, Square’s, current CFO is doing phenomenal in her role. He tends to subscribe to that Warren Buffett mindset of I’m going to find the best people possible and then not tell them how to do their jobs. Which is a great management style.

Jason Moser: It can be, it can be.

Matt Frankel: If you’re not familiar, Credit Karma, which we never get a chance to talk about because technically they are one of our competitors in a lot of ways and we don’t really talk about our competitors that much. But Credit Karma is being acquired by Intuit (NASDAQ:INTU), the parent company of TurboTax. As the regulatory concern, Credit Karma, tax preparation is not their primary business, so they really don’t care about getting rid of it. The fact that Square’s buying it, it kind of fits into, I mentioned Sarah Friar, it fits into her mindset that she wanted Cash App to be able to do for people whatever their banks could do. Her vision was to have checking accounts, personal loans, insurance products, mortgages, auto loans, the whole nine yards, and tax preparation is a pretty natural fit in that. The concern is whether Square’s getting into too many different growth verticals at the same time.

Jason Moser: Yes.

Matt Frankel: We know and we’ve talked about Jack Dorsey’s love affair with Bitcoin, which as I’ve said before, it’s my least favorite part of Square. But Square’s trying to build out online store right now. Their brokerage is just getting going really. Remember they launched the ability to trade stocks on the Cash App, and they’re applying for a banking charter at the same time. Maybe going to do personal lending through the Cash App. Who knows? Their businesses that they have now are growing at phenomenal rates, 40, 50 percent revenue growth a year. Should they just focus on keeping those growing for the time being? Or should they spread their focus out to even more verticals while everything is going so well. That’s kind of the big question. Tax planning is not a core competency of Square. It’s not going to be a core competency of Square. The question is, does that make Cash App more valuable to people and therefore, lose membership and boost monetization, things like that. So I’m curious to know where you stand on that, but I would be in favor of this move as long as it was for a reasonable sum of money.

Jason Moser: Yeah. I think you probably hit on the point I would have mentioned, price to me is everything here. As long as they’re getting a fair price and they’re not out there trying to outbid someone else for this because I do feel like I’m getting a little concerned. Are they pursuing too many verticals at once versus not really just focusing on doing a couple of things really well right now. I can see the merits to both. We can see examples throughout history of it working out both ways too. Then when it comes to his management style, it really just boils down to making sure that you’re hiring good people, and I think he tends to do that. He’s even said before. That he sees that as his primary role is basically finding the talent to help run these businesses and letting them do their thing. Hopefully, that does work out the way it’s worked out for Buffett and Munger through the years over at Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B). I certainly like the markets they’re pursuing. Remember when they got rid of Caviar? Remember they got rid of Caviar, the food delivery business, that to me was a perfect example of a business that just wasn’t really in line with the rest of the stuff they were doing. The tax business could be. I don’t know what kind of traction it’ll gain. But certainly, it made me think about that bigger question of, all right, let’s make sure these guys aren’t trying to do too many things at once because that can really be difficult sometimes. It’s something to keep in mind, I guess.

Matt Frankel: Yes. Like I said, it needs to be for a reasonable price and it needs to add value to the business. The difference between Caviar and this, Square wants all their businesses to now fall into two very distinct baskets. Does this help people with personal finance, does it help with small business finance? Caviar doesn’t really fit into either of those, but tax-preparation definitely fits into the personal finance basket. That’s why it makes a little more sense than a Caviar type business, but I guess it has to be for the right price. I can’t imagine credit cards tax prep businesses is a giant moneymaker at this point.

Jason Moser: Yes. No, I mean, TurboTax, they really do own that market in a lot of ways too. But it can be sticky. It can be sticky so if they do it right, who knows? Jack has a good long term focus and I really like that about him and so I remain a very happy shareholder and I’m sure you do too.

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