Square the bill?

Will Square (Block) become a Bitcoin-centric consumer bank on the back of the Cash App? Or will they be forced to pivot back towards their Payments Value Prop. to gain market share?

We look into the Business Model + Analytics to forecast what Square might look to achieve around the future of money.

Square Business Model

Square Everywhere

Square was founded in 2009 by Twitter co-founder Jack Dorsey as a payments solution for small businesses.

The infamous ‘Square’ logo can be seen in physical stores around the world, a product that has since a disruptive wave of payment processors seeking to take on the industry giants who went without competition for decades. It’s not hyperbolic to see that you pretty much see a Square terminal everywhere these days.

The innovation didn’t stop there. Cash App was launched in 2013 as a P2P (peer-to-peer) Payments Network. Part of Cash App’s growth was attributed to an openness to experimenting with Bitcoin payments, a bet that paid off with the explosion of Bitcoin over the course of the last decade.

The app is set in a hyper-competitive P2P market along with the likes of Venmo and Zelle, yet has remained ‘top of the charts’ in terms of popularity for the last several years.

Cash App has been the #1 finance app in the App Store for five years running, has 80 million users, and last year was the 8th-most-downloaded app in the U.S. across all categories.

Digital Native – Substack

Cash App is much more like a social network than a bank; yet paradoxically, it has the potential to lead towards Square – or Block as it became in December 2021 – becoming a consumer bank in the future.

Before thinking that this sounds farfetched, consider that Square has already received its Industrial Loan Company (ILC) license from the FDIC in the U.S. That has enabled Square to loan money to its merchants and offer insured accounts.

The vision for Block is grander than even just Square or Cash App. Spiral (formerly Square Crypto) is a Bitcoin-focused Grants program to accelerate innovation in the Bitcoin ecosystem. Square took an 80% stake in music streaming platform Tidal for ~$300M USD in March, 2021.

They also acquired BNPL upstart Afterpay for $29B in August, 2021, opening up the multi-trillion dollar consumer credit market to the company.

Because of this there are a lot of moving pieces to the Square business model. The shift towards Cash App, Bitcoin, counter-culture music initiatives may signal a strategy that is centered on the ‘underbanked/unbanked’ segment in the U.S., pitting it directly against Paypal and Venmo in the future.

Google Trends – Cash App vs. Venmo

How does Square (Block) make money?

Square’s recently reported financial results in August of 2022 for Q2 ’22 showed a breakdown of the four major revenue categories that the company segments its results around:

• Transaction-based revenue ($1.475B USD, + 20% QoQ)
• Subscription and services-based revenue ($1.095B USD, +60% QoQ)
• Hardware revenue ($48M USD)
• Bitcoin Revenue ($1.786B USD, – 34% QoQ)

As we can see above, the heart of the business model remains Square terminal payments (GPV and subsequent margin) and emerging revenue streams from Cash App, which currently only accounts for 8% of GPV (Gross Payment Volume). As a whole, the company reported a 6% decline in quarterly revenue (QoQ) compared to 2021.

But -ex- Bitcoin and BNPL (Buy Now Pay Later) revenue, they would have been +23% in net revenue on a YoY (year over year)

This shows one of the challenges of business model innovation (BMi), as volatility in Bitcoin and challenges related to their new BNPL platform integration (via Afterpay acquisition) slowed the momentum from their core business.

Transaction-based gross profit on GPV was 1.14% for the quarter, down 0.13% YoY and 0.04% QoQ. This is consistent with the Payments business model, which is low margin on high volume.

Subscription and services-based gross profit was 81% , related to Banking Products such as Square Loans, Square Card, and Instant Transfers. This revenue segment is also comprised of software sales for Square.

Cash App Business Segments

Cash App itself has four separate business segments:

• Instant Deposit
• Cash App Card
• Bitcoin
• Business Accounts

Cash App generated $1.79B USD in gross revenue from Bitcoin and only $41M in gross profit (2.3%). These numbers will wildly fluctuate with the volatility and demand for Bitcoin. When Square rose exponentially in 2021, a lot of the upside could be attributed to the exponential increase in price and demand related to Bitcoin.

The BNPL platform (via Afterpay) is part of the Cash App platform and contributed $104M USD of revenue and $75M in Gross Profit for the quarter. BNPL is an emerging segment in the credit space, a sector that has its own challenges.

Transaction, loan, and consumer receivables losses were $157 million in the second quarter of 2022, up 225% year over year. The increase was driven primarily from consumer receivables losses related to our BNPL platform.

Square – Shareholder Letter Q2 ’22

With all the moving pieces, we can see a declining (Adjusted) EBITDA on a quarterly basis compared to the peak in 2021.

To summarize, the core of business model remains Payments + Subscription & Services revenue. Square’s POS (Point of Sale) terminal for merchants drives the vast majority of Payments GPV, while Cash App contributes to an array of Subscription & Services revenue in the Banking category.

Bitcoin and BNPL remain wildcard levers in the long-term business model. Both seem core to the future of the company, but create a lot of uncertainty short-term.

Square (Block) Business Model Canvas

Square (Block) Value Proposition

Payment Processing leader (Square) and P2P Payments disruptor (Cash App) in consumer banking sector:

• Low Friction Payments + Loans – for SMEs
• Instant Transfers, Bitcoin, Credit – for consumers, available in one app

Square Cost of Revenue Visual (via Marqeta)

Cash App is powered by fintech infrastructure provider Marqeta (Ticker: MQ). Below is a visual of how the Cost of Revenue breaks down relative to each players’ Take Rate.

*Note that this data was taken from the Marqeta S-1 in Q2 2021. Some variables may have changed, but more than 70% of Marqeta’s current revenue still comes from Square (via Cash App)

“Block accounted for 72.5% of our net revenue up from 69% in the second quarter as the Cash App card continues to grow active users and drive engagement,” Marqeta CEO Jason Gardner said

Payments Dive

Square (Block) Business Model Analytics

The Square merchant Payments business continues to demonstrate strong growth and profitability, so the company seems focused on Cash App and increasing monetization now that they have reached more than 45 Million MAUs (Monthly Active Users).

When looking at the above diagram in relation to different Business Model Analytics – Behavioural, Retention, Channels – it is clear that Block has placed a large value on Retention, which is indicated by their product design (to make it more like a social network) and overall marketing strategy.

Cash App MAUs Across Categories

To break it down across the different categories within Cash App:

• Cash App Mobile downloads: 80 Million+
• Monthly Actives Users (MAUs): 45 Million+
• Monthly Actives Cash App Card: 15 Million+
• Monthly Actives Direct Deposit: 1.5 Million+
• Actives Credit Borrowers: 1 Million+
• Actives Bitcoin: 10 Million+

We can see in the diagram above that Block wants to move users up the chain towards Borrow and ultimately Direct Deposit. This is the point where they begin competing with banks, especially the challenger/neo banks.

Looking at each of the above segments as Behavioural analytics would probably yield unique results, as the question as to why they are using it and whether or not they are switching from a primary bank as a result.

This shows us that it is no longer just about Cash App versus Venmo, but competition is increasing between Block and the mainstream U.S. financial services industry.

The below shows us as average revenue breakdown across MAUs. If we were to assume that the quarterly calculation here ($1,052 x 1.19% = $12.50) would scale out evenly on an annual basis, that would give us a $50 ARPU (Average Revenue per User – not Net Revenue).

We can get a good feel below that the margin on that spend is decent, depending on the specific mix of products. In aggregate, it is hard to assess as these are averages. In reality, there are probably some segments within Cash App that are super popular, and others that aren’t.

Where their business model starts to gel is with their insanely low CAC (Customer Acquisition Cost).

To get an estimation of how efficient their Business Model Analytics and LTV (Lifetime Value) ratios are, we would need to look more into Churn and User Retention, which are difficult to obtain.

Looking at certain sentiment indicators versus Venmo may help paint a picture, but ultimately we would need to see the raw data to judge how these trends play out over the long-term.

Clicking into Apptopia’s Review Analysis, we see that over the past six months, Venmo’s daily review sentiment ranges from 60-65% positive while Cash App’s range is only 45-53% positive.

Apptopia

These types of models in Fintech tend to have lower Operational Expenses around Customer Support and other equivalents compared to Big Banks. This is part of the allure of being a digital-only ‘challenger.’ But these are where some of the chinks in the armour of the business model typically start to show.

Big Banks big advantage is that switching costs are usually extremely high and they invest enough in certain areas to keep the customer long-term.

The LTV for Big Banks is typically stunningly high, but they have extremely high CACs. Block seems to be the opposite, with a super low CAC, decent ARPU, but questions surrounding LTVs as they scale out into mainstream financial services.

Future Focus – Banking the Underbanked

The Square Payments business continues to grow steadily and the addressable merchant market remains large for Square despite increased competition. In that light, the focus of the future will likely remain on Cash App and the potential to emerge as a consumer banking powerhouse.

The infamous ARK Investment Fund explained their thesis on Cash App and Square in September, 2020 that – principally – around Block being able to scale-up their consumer banking business to ARPU (average revenue per user) levels seen in the Big U.S. Banks.

On average, Wells Fargo, JP Morgan Chase and Bank of America generate roughly $880 in revenue per active digital customer per year.[1] The net interest income tied to a small subset of customers accounts for the majority of this revenue.[2]

ARK

As we have seen above, Block’s big advantage is the network effects on Cash App, leading to significantly lower CAC costs and creating an expanding user base for monetization across various Banking products, including: Payments, Direct Deposit, Bitcoin, Loans, BNPL Credit, etc.

The difference is that the segments that Block serves is much different than the traditional Big Banks.

To get anywhere close to $880 ARPU per MAU would require Block to basically replicate Cash App into a Big Bank product, complete with an increasing array loan products that would likely scale-up towards including mortgages. Nothing in Block’s current branding or messaging dictates they are heading down this path.

Block’s Big Market Opportunity

The big opportunity for Block likely comes from an edgy combination of the above products, creatively marketed towards the mid-market segments of the U.S. (and internationally) who are underserved and/or completely dissatisfied with their current banking services.

The Afterpay acquisition gives them access to a large market outside of the U.S. as they seek to find ways to integrate those networks towards the core Block products in the future.

In the end, their bets on Bitcoin may be what turns them into a huge consumer phenomena, or not. The ‘Blockchain Banking‘ segment explored some of the factors driving the battle for everything related to the future of banking, which is some way shape or form will revolve around cryptocurrency. Block is unique in that is completely focused on Bitcoin.

If Bitcoin takes off within its core market in the U.S., for example, and the Lightning Network enables scaling of merchant and P2P Payments, nobody is better positioned than Block. But if the opposite is true, Block will lose a huge share of revenue like we saw in the recent quarter.

Overall, Block has a very complicated business model between merchant and P2P Payments, Banking Subscription and Services, Bitcoin, and BNPL. The upshot is, they have two cutting-edge brands – Square and Cash App – that enable them to build huge, lucrative networks of merchants and consumers alike. How they connect the dots in the next 2-3 years will determine whether they emerge as a financial services powerhouse or not.

More Square Business Model Posts

Business Model Canvas – Payments

Business Model + Analytics – Venmo

Fintech CAC (Customer Acquisition Cost)