Fintech Case Study: Block Inc. (Formerly Known as Square) — Part 1

6 min readMar 15, 2023

Source: https://squareup.com/us/en/townsquare/credit-card-processing

Introduction

Block, Inc. previously known as Square, is a San Francisco-based financial services and online payments company founded by Jack Dorsey and Jim McKelvey in 2009. The company announced its name change to Block, Inc. in December, 2021, after Dorsey resigned as CEO of Twitter.

So, why did I pick Block Inc. to do case study?

As a public company, its financial reports provide more information than other privately held companies.
Additionally, it was established in 2009, not too early compared to other publicly traded fintech companies such as PayPal (1998), Paysafe (1996), and Shift4 (1999).
It reflects the challenges that most mobile payment companies face and doesn’t have the legacies of other large financial companies.
Most importantly, Block Inc.’s 196-page 10-K form in 2022 is the most comprehensive and clearly illustrates its businesses. The form analyzes Block’s revenue model, products and services, and provides a good window into other mobile payment companies.
Block’s business model includes some very interesting topics in fintech, such as BNPL, bitcoin trading, and P2P.

Taking a First Look at Block Inc.

Block started with the main business of payment processing, aiming to provide users with a seamless and affordable payment solution. Over time, it expanded its services organically and through acquisitions to build a complete, profitable, and competitive fintech ecosystem. Let’s take a look at its development timeline.

2009: Company founded
2012: Series D round valued the company at $3 billion
2013: Launched Square Cash (later rebranded as Cash App) and generated over $500 million in revenue
2015: IPO raised $243 million, valuing the company at around $2.9 billion
2018: Started offering crypto trading
2021: Acquired TIDAL (a music-streaming service) and Afterpay (to offer “buy now, pay later” services); also changed its name to “Block”

As of the end of 2022, the company has two reportable segments: Square and Cash App. According to its Annual Report, each segment is considered an ecosystem, consisting of various products and services. In both 2021 and 2022, Square and Cash App achieved roughly 50% of the company’s total revenue.

Source: SEC 10-K Form of Block Inc. Retrievable from https://s29.q4cdn.com/628966176/files/doc_financials/2022/q4/f0d4876f-97d5-495a-b76b-1316e79608b9.pdf

In addition to the two ecosystems, Square generates moderate revenue from selling hardware (less than 10% from POS hardware, etc.) and its bitcoin business. Bitcoin revenue peaked in 2021, accounting for 81% of Cash App revenue and over 56% of total net revenue.

As for the acquired businesses, the results of Afterpay have been equally allocated to the Square and Cash App segments as the BNPL platform will contribute equally to both the Square and Cash App platforms. Square hasn’t revealed much about its plans for TIDAL yet.

Within the fintech framework, there are many verticals, such as blockchain/cryptocurrency, personal finance, payments/billing, capital markets, wealth management, alternative financing, transactional services, and neobanks. Block has carved out a substantial piece of the payment market with its Cash App and the financial services market with its Square ecosystem. Each ecosystem represents a specific business model and is worth a separate section on its own.

Taking a Closer Look at Block’s Cash App Ecosystem

The Cash App is such a great example of a mobile payment model that I believe it deserves a separate section.

The main goal of Cash App is to provide a straightforward and inexpensive peer-to-peer payment service that eliminates intermediaries.

Originally, Cash App was a simple payment service. Users only needed to connect their debit card and then they could pay others via email, without the multiple steps and delays associated with online payments at the time. In its first step towards monetization, Cash App charged businesses 1.5% per transaction, while users could send money to friends for free. Users only needed to connect their debit card and then they could pay others via email, without the multiple steps and delays associated with online payments at the time.

By the end of 2022, the largest percentage of gross profit for Cash App comes from subscriptions and services fees (Cash Card interchange fees, instant withdrawal fees, and interest income on customer balances). Unfortunately, only 25% of active users have the Cash Card, which unlocks all of this profitable subscription and service revenue.

Products & Services

Cash App offers a variety of products and services, including money transfer, Cash App Card, securities trading, bitcoin trading, stock investing, direct deposit, BNPL, and other services.

Users and Revenue Growth

Since its launch, Cash App has experienced significant growth. According to its 10-K Form in 2022, as of December 2022, Cash App had over 51 million monthly transacting actives across the United States and Europe.

Graph retrieved from https://infogram.com/cash-app-revenue-1h8n6m3e3y1oj4x

Table retrieved from https://www.businessofapps.com/data/cash-app-statistics/

Revenue Drivers

Cash App generates revenue through transaction-based and subscription-based services. The more users who use the app’s paid services, the more revenue it generates. As a fixed-cost business, Cash App’s profitability comes from economies of scale and lower costs per unit.
In addition, Cash App is also building a complete ecosystem with diversified features and cross-selling, which serves as a barrier of entry for competitors and increases customer retention rates. For example, Cash App offers various services such as Gift Cards, Boost, tax filing, and more. These services keep customers coming back to the app and build a community that effectively acquires new customers through word-of-mouth.

Cost Drivers

Cash App doesn’t earn revenue on most peer-to-peer transactions. However, it incurs various costs such as card issuance costs, peer-to-peer costs, and risk loss as a sales and marketing expense. To expand its network, Cash App uses paid marketing strategies like referrals, advertising spend, partnerships, and social media campaigns to reach new customers, enhance its brand, and improve retention among existing customers.

The costs incurred by Cash App can be roughly categorized as follows:

Transaction-based costs: Since most peer-to-peer transactions are free, Cash App bears the peer-to-peer cost. Besides, transactions with banks and third-party processors also incur settlement fees, processing fees, and transaction losses.
Service-based costs: These are processing and partnership fees related to Cash App, including Instant Deposit and Cash Debit Card.
Operating costs: These include card issuance costs, customer referral bonuses, marketing expenses, salaries, overhead costs, IT-related expenses (including back-end processing, security, apps, and websites).
Bitcoin costs: These refer to the cost incurred from purchasing bitcoins that are sold to customers.

In this article, we have discussed the cost components of traditional banks and financial services. It is interesting to note that, except for IT-related costs, the elements are quite similar.

Competitive Landscape

Cash App competes with not only P2P mobile payment companies like Venmo (part of PayPal now), PayPal, and Zelle, but its trading functions also invite competitors like Robinhood. In general, mobile payments have become a more competitive field, with players coming from:

Small startups that keep coming up with new solutions and cheaper transaction fees.
Large international banks that offer money transfer and trading options.
Tech companies that are also offering payment functions, such as Google Pay, Samsung Pay, and Apple Pay.

Customers

Cash App primarily serves customers from the United States and Europe. Its user base in the US can be broadly has the following features:

Underbanked and unbanked individuals who may have lower credit scores and find traditional banking with big banks intimidating
Younger users who are more inclined to adopt new technologies
Individuals who lack financial literacy and understanding
Less affluent users who may have limited financial resources

However, these characteristics, particularly the presence of less affluent users and those with lower credit scores, raise concerns about the long-term profitability of Cash App.

Channels

Peer-to-peer payments are central to Cash App’s community development pillar. By using peer-to-peer, customers invite others to download Cash App and send money to each other. As communities grow, the service becomes more valuable, encouraging customers to expand their networks. Square offers peer-to-peer for free when linked to a debit account as a marketing tool to promote Cash App usage. In this way, Cash App brings the CAC (Customer Acquisition Cost) down, and builds a popular culture to attract younger generations.

Reference: