Decoding Block – Cash App & Square

Block is one of the most interesting consumer fintech businesses in the US and the world. It is also one of the few companies with a successful consumer (Cash App) & B2B Play (Square). 

In this post I’ll be focusing on the aspects in this blog post. 

1. Beginning and going upmarket
2. Terrific growth
3. Network effects & moats
4. Big consumer & B2B plays
5. Effective monetisation  

This might be a good read for product, marketing and business managers trying to monetise their app products, build virality and lower CACC, create lock-in and overall build more sustainable businesses.

Let’s start with its financial performance. 

In the last quarter reported for Q2 2022, Block had a gross profit of $1.47B with a 29% growth in profit year on year. 

Block comprises of 2 companies –

1. Cash App – A p2p payments and services app
2. Square – Pos and other services for merchants.

Reiterating my point on the strength of its consumer and business verticals, they almost generated an equal amount of gross profit from both businesses with both showing about 30% growth YoY.

Let’s get started and understand the evolution of Square.

Beginnings & going upmarket

Square started in 2009 to enable anyone with a mobile device to accept card payments. And unlike a lot of tech companies, it went public 6 years later in 2015. In 2015, they processed a GPV to $35.6B with 712m payments from 190m unique cards. Just 7 years later, GPV has grown to $152.8B with over 3B payments from 526m cards. The GPV alone has grown at 23% CAGR. But how did Square enter an existing market? Let’s understand.

As a new company in the POS space, Square had the following approaches available to enter into the POS market – 

1. Hardware 
2. Hardware + Software
3. Software only 

As I mentioned in my post on QR codes, POS infrastructure is typically expensive and thus a big hurdle for adoption by merchants. A typical device in India costs about Rs. 10,500($131).  The best approach is to use software only and use the mobile phone as a complete mobile acceptance device. A mobile app can be used to recognise the card using NFC and then authorise the transaction using a pin. However most mobile devices don’t have NFC technology and this leads to an incomplete solution – a strict no-no in payments technology. 

Square was able to circumvent this limitation by focusing on its reader device. Instead of being a standalone app, it created a device to connect to your iPhone or iPad and start accepting payments. 

Thanks to Square reader’s ease of getting started, distinctive design and no fees for the reader, they were able to quickly onboard smaller merchants. 

If we check their seller network in 2015, we can see the smaller merchants with a GPV of less than $125k made a majority(87%) of its customers. This is excluding Starbucks as the biggest merchant on their network. 

Over a period of time, this GPV mix has changed considerably with the range of products also offered changing from just the Magstripe reader to a host of POS solutions for merchants of all sizes and shapes. By 2021, Square has been able to change the GPV mix with 37% GPV coming from large merchants in Q4 2021. Not bad for starting out focusing with a simple reader. 

Square has now expanded from offering just payment accepting devices to offering an entire set of services to manage payments, customers and invoicing. 

Current set of POS devices offered by Square at different price points:

If we look at the above set of devices, the common thread is using the power of the iPad or iPhone to power payments. Also from price points from free to $799/month, they’re able to cover different needs for different merchants. In another post, I’ll cover the following dimensions to expand their merchant base. Square is currently using a mix of them. 

1. Vertical approach – one category 
2. Horizontal approach – one set of business 

1. Small & Medium Business (payment volume less than X & order value Y)
2. Big merchants 

It’s terrific growth 

The 2nd most remarkable thing about Cash App has been its terrific growth trajectory. At last count, Cash app had 80 million (26% of US population)(last updated on 22/05/2022) users monthly transacting on their app for a variety of services from p2p payments, p2m payments, neo-banking, stock broking, crypto investments and more. 

This is even more remarkable if taken into consideration that it entered the market when Venmo, Paypal and other giants had captured sizeable market share. And payments were felt to be a largely solved problem. And it started with a simple promise to send and receive money. This once again proves that the largest opportunities lie in the core business and if one can find a GTM to attack the market, the returns can be huge.

If one checks out the initial reports and investor presentations, its quite clear Square Cash was one of several bets. However its growth has been nothing short of remarkable. 

Let’s understand the product offerings of Cash App. 

Fig 1: Cash App ecosystem — slide from Square Inc Investor Update Slides (March 2020)

The core value proposition is P2P transfer. And it launched with this proposition in Oct, 2013 to users.

This is very similar to the experience we currently experience with Gpay/PhonePe in India, but one has to consider in the US p2p transfer isn’t exactly solved. Thus if you’re looking to pay/get paid for odd jobs, Cash app is perfect.

Over time this proposition has grown to add a rewards program(Boost), Bitcoin trading, Stock trading, Debit Card(Cash Card) and Direct Deposit. 

A big part of this growth has been its ‘network effort’. Cash app is probably one of the big examples of successful referral marketing. But they’ve taken it to a new level. In India Gpay too paid paid out a cash reward for sending money to a new customer. Unlike other reward programs where the focus is just on downloading the app, here GPay was able to uniquely link their Google account with their bank account & UPI handle creating an immensely powerful network.. 

But there’s a second part to this trick. Cash app also uses influencers to give out cash to users using their $CashTag. The lure of quick cash enables a lot of users to create their accounts. 

While the contribution of these campaigns to their marketing is unknown, it does have an enviable CAC in the industry with $10 compared to insanely high acquisition costs for its competitors. 

Further expansion with a range of products – 

Cash app has pressed on the advantage in all 3 areas – a. Acquisition (by building products with inherent network effects) b. Engagement – high engagement products like Cash Card c. Monetization (as we’ll explore in the blog later)

Cash app engagement and virality products. 

Cash Card – the first step of Cash App to go offline and into the user’s pocket. 

Moat & network effects 

Over the last 2 years, I’ve spent a larger amount of time thinking about the ‘MOAT’ of a business. In internet businesses, it’s no longer sufficient to find scale as retaining that business is ever more difficult. 

Some examples of Moats 

1. Brand 
2. Network effect 
3. Lock-in 

In my opinion, Block has been able to create a moat by focusing on 2 aspects a. Network effect and b. Lock-in. 

Cash app focuses on the network effect. Each customer added to the network strengthens the value proposition for everyone as p2p transfer becomes more seamless. And Square has a moat on the merchant side, the more merchants accept Square, the more brand and customer recognition it creates for customers and merchants.

Over time, Cash app is transforming from a P2P app to an end to end finance app that meets both your needs – credit and debit. This is different from the ‘Super app’ thought process where one tries to fulfil all needs.

Square has focused on lock-in. By going deeper into the life of a merchant, it has made its service indispensable.  

Fig 6: Square list of products. 

As you can see Square covers the entire gamut of services for businesses – 

1. Point of sale (Payments)
   1. General
   2. Restaurants 
2. Payroll
3. Invoices
4. Appointments 

And much more. Leading to more and more lock-in both for the consumer and merchant business. 

It’s effective monetisation 

Block is truly remarkable in the way it’s been able to monetise. 

Square and Cash app are polar opposites in a sense. Square is a more traditional business with transaction revenue comprising a bit part of its overall revenue and it’s trying to expand to add additional lines of revenue. Cash app on the other hand doesn’t have a very traditional business model and is creating a new category of financial super app with revenue from several sources including subscriptions and services. 

In the 2022, Block did a revenue of $17B. 

Revenue for Block is broken down into 4 different categories: 

Transaction revenue: transaction fee applied on the transaction amount. Typically 2.6% + 10c of the transaction amount charged to the seller. P2P in business accounts and payments made via CC(similar to a PG business). 

Subscription and service based: Cash app and allied services.

Hardware revenue: Sales of hardware. 

Bitcoin revenue: Fees whenever the user trades or does a transaction. Margin between buying from a customer/broker and selling it to the customer.  

If we compare the financial performance of the last 2 years – 

2021 Revenue	Amount(2021) in K	Amount(2020) in K
Transaction	4,793,146	3,294,978
Subscription and services	2,709,731	1,539,403
Bitcoin	10,012,647	4,571,543
Hardware	145,679	91,654
Total	17,661,203	$ 9,497,578

As we can see Square app had their revenue increase by almost $8B in a single year. $5.4B of the contribution of increase was due to revenue from Bitcoin transactions.

One of the key insights here is that the hardware is primarily an acquisition tool for the merchant business for Square. 

Revenue mix excluding the revenue from Bitcoin – 

As we can see from the above diagram, Bitcoin services revenue comprised a significant part(56.7%) of the revenue in 2021. However it is more prudent to understand the revenue mix excluding Bitcoin as Bitcoin had a stellar ride in 2021 and activity has reduced to a great extent in 2022. 

Let’s understand the mix of revenue across their 2 products – Square and Cash app. 

2021 Revenue	Amount(2021)	Amount(2020)	% growth
Cash App	12,315,499	5,968,386	106%
Square	5,193,348	3,529,192	47%

We can see that Cash app generates substantially more revenue than Square. 

Let’s try to understand the sources of revenue for Cash app – 

Cash app has currently revenue generated from 4 different sources:

1. Bitcoin trading 
2. Cash App Instant Deposit
3. Cash Card
4. Cash for Business 

2021 Revenue	Amount(2021)	Amount(2020)	% Growth
Cash Card & Business & Instant Deposit	​​2,302,852	1,396,843	65%
Bitcoin	10,012,647	4,571,543	67%
Total	12,315,499	5,968,386

We’ve explained the revenue from Bitcoin trading above. However the gross profit for Block is only 4.9% of the total gross profit. Thus the healthy growth is attributed to growth in Cash app active customers, increase in Business accounts and broader economic recovery. 

The success of Cash app’s monetisation is in my opinion due to 2 reasons – 

1. Increasing lock-in 
2. Ecosystem strategy 

Let’s understand the first point. 

1. Increasing Lock-in 

One of my biggest theories is that for app products to become sustainable businesses, they have to find a way to lock-in the customer. Without a central reason to lock-in the customer, churn is a recurring problem and up-hill battle for both growth and monetisation.

This theory is validated in some way by the change in the revenue post introducing Cash Card. An offline product that complements your online experience leads to an overall increase in retention, engagement and hence monetisation. 

And we can see that in the current year, out of the 47m monthly transacting users, Cash Card comprises an enviable 15m users. 

The other important thing is ecosystem play. To build habits across items to increase revenue from them all. 

However we can see from the latest presentation that they’ve been able to further increase it to $45 by the introduction of borrow. 

Let’s try to understand the sources of revenue for Square – 

Square has currently revenue generated from 4 different sources:

1. Transaction revenue 
2. Hardware revenue 
3. Other? 

A big driver to revenue in Square is the transaction revenue. While there’s a lot more to explore in this piece too, i’ll keep it for a separate post. 

Now that we understand the 2 businesses, let’s understand the more profitable one currently – 

2021 Revenue	Amount(2021)	Amount(2020)
Net revenue	12,315,499	5,968,386
Cost of revenue	5,193,348	3,529,192
Profitability	10,012,647	4,571,543
	17,661,203	$ 9,497,578

2021 Revenue	Amount(2021)	Amount(2020)
Net revenue	12,315,499	5,968,386
Cost of revenue	10,244,652	4,742,808
Gross profit	2,070,847	1,225,578

2021 Revenue	Amount(2021)	Amount(2020)
Net revenue	5,193,348	3,529,192
Cost of revenue	2,876,677	2,021,361
Gross profit	2,316,671	1,507,831

We can thus see that even though the revenue is greatly different for the two products, the net contribution to gross profit is pretty close. 

And that’s it for now. 

In upcoming posts, I’ll cover a few other topics like payback period, effect of retention on Square and Cash app, commentary of the Flywheel deployed by Cash app and more. 

References:

Cash App Presentation Q2 2022 – https://s29.q4cdn.com/628966176/files/doc_presentations/2022/05/Cash-App-Block-Investor-Day-2022.pdf 

Square Presentation Q2 2022 – https://s29.q4cdn.com/628966176/files/doc_presentations/2022/05/Square-Block-Investor-Day-2022.pdf 

Block Annual Report – https://s29.q4cdn.com/628966176/files/doc_financials/2022/ar/Block-Annual-Report-2022.pdf