Executive Summary

Block Inc. (formerly Square) is a merchant and mobile payment platform founded by Jack Dorsey and Jim McKelvey in 2009 and headquartered in San Francisco, CA. Today, Block provides merchants in the United States, Canada, Australia, UK, and Japan with a suite of services and products to help fulfil sales transactions, employ marketing tactics, and manage inventory, staff, and finances. The company operates through the following products: Square, Cash App, TIDAL, Spiral and TBD54566975. Block’s target market is business owners, making it a mobile payment processing company, while its other arm of business, Square Cash App, is a merchant bank. 

Despite being the largest payment service provider, Block suffers stiff direct and indirect competition from PayPal, Intuit and others. Its strengths, such as its vast portfolio of products, rapid growth, strong financial performance, and innovation and expansion policies, give it good leverage to make significant technological advancements and improve its customer preference ratings.

History

In February 2009, Block was launched with the Square ecosystem to provide businesses with exposure to card payments, a crucial feature previously unavailable to many businesses. As Block expanded, they moved on to apply their expertise in technology and innovation to support sellers. Since then, they have grown the Square ecosystem to offer sellers more than 30 different products and services that aid in managing and expanding their businesses. 

Square, formerly known as Seller and Cash App, are Block’s two reportable segments, which reflect their two main ecosystems and how management and their chief operating decision maker (“CODM”) analyze and evaluate the company’s performance.

Block changed its name to Square on 1 December 2021. As a result of this action, the Square brand, for which the Seller business was designed, has grown to be associated with it. 

Business Model 

Early on, Block’s main target was social media savvy and tech-loving early adopters, so they focused on content creation from their blog, sharing thought pieces and customer experiences using their products and testimonials. As it grew, Block leveraged its loyal customer base to bring forth innovative ideas (Square, 2022).

Instead of concentrating on short-term revenues, Block began to reinvest its funds in long-term projects that either (1) boost its brand and products or (2) assist it in selling new or upgraded services to existing clients or higher-priced products. 

Block offers sellers hardware and software tools to manage their businesses effectively. The company generates revenue through subscription services and transactions involving its payment solutions, likewise through the sale of hardware and software. Square’s Cash App generates revenue as well. 

Block’s revenue sources are primarily divided into four streams:

1 Transaction-based revenue: Block charges a fee whenever its debit card or Cash Card is used and also takes a portion of every transaction completed by businesses at its terminals. 

2 Revenue from subscriptions and services: This comes from financial services like loans (Square Capital), food delivery (Caviar), and other offerings like Cash Card and instant deposits.

3 Sales of hardware and software: This comes from the sale of Square Register, Square for Restaurants, chip and contactless card readers, and other point-of-sale software. Block has created software, hardware and financial products & services that have helped businesses start, run and grow their retail companies. This is in addition to the over 100 third-party software that can easily be integrated into their Block experience (Block, Inc., 2022)

4 Bitcoin: Through its Cash App, Block offers customers the option to acquire bitcoin, with a small fee added to the transaction cost. It is worth mentioning that Block’s bitcoin revenue has always changed owing to the volatile nature of bitcoin pricing and consumer demand. 

Segment	Revenue in Q1 2020	Revenue in Q4 2020	Revenue in Q1 2021	Revenue Share in Q1 2021
Bitcoin	$306	$1756	$3511	69.4%
Hardware	$21	$24	$29	0.6%
Subscription and services-based	$296	$449	$558	11.0%
Transaction-based	$758	$929	$960	19.0%
Total	$1381	$3159	$5057	100.0%

(Business Quant, 2022)

Square Ecosystem

Square provides a well-rounded commerce ecosystem that aids in the launch, management, and expansion of businesses. Square mixes hardware, software, and financial services to produce simple, quick and attractive products and services. These features set Square apart in a fragmented market where sellers have always been required to combine goods and services from various providers, frequently using antiquated non-digital methods and equipment. More than 3 billion card payments from 526 million payment cards were completed for the fiscal year that concluded on 31 December 2021, resulting in $152.8 billion in Square Gross Payment Volume (“GPV”). By the end of 2021, there were over 261 million buyer profiles in Square’s ecosystem, and there were almost 366 million items listed on Square by sellers. (Block Inc., 2021) 

Cash App Ecosystem

Cash App offers an ecosystem of financial products and services to redefine how people manage and interact with their money by making it more relatable, instantly available, and universally accessible. Cash App initially only offered the ability to transfer and receive money, but it has since expanded to offer a range of financial services that let users store, send, receive, spend, and invest their money. (TechCrunch, 2020)

Customers can send money for free using the app’s basic version. Block charges a flat fee of 2.75 percent to businesses for every eligible transaction in one of two ways: (1) when a customer pays a company through an in-app P2P transaction. (2) Whenever a customer pays a company with their Square Cash Card. 

A prepaid Visa debit card called the Cash Card is connected to each user’s account. Cash App direct deposits and funds are made immediately available as it is sent, making it have an earlier payment service of 2 days compared to regular banks (Square, 2021). Similarly, in 2021, Square launched Square banking, a suite of financial tools and products to empower small businesses with the cash they need at their centres (Reuters, 2021)

(CBInsights, 2018)

Tidal  

Block completed its acquisition of a controlling ownership interest in TIDAL in quarter 2 of 2021, along with licensing agreements with significant record labels and recording artists associated with the business. TIDAL is a worldwide music and entertainment platform that Block acquired in a bid to further its mission of economic empowerment for artists. 

TIDAL has a sizable library with more than 350,000 high-quality videos and 80 million tracks. It launched several ground-breaking changes in November 2021, including a new, free tier that offers users in the United States uninterrupted access to its entire library, HiFi Plus royalties, and direct-to-artist payments (Block Inc., 2021). 

It is interesting to note that Block has a variety of opportunities to use its new portfolio firm to increase its position in the music industry. The company, or perhaps one of its subsidiaries like Cash App, may be interested in entering the market entirely with a record label of its own. The next step, however, remains to be known.

TBD

Block launched TBD in quarter 3 of 2021, intending to create an open developer platform that would simplify for individuals and businesses to access bitcoin and other blockchain technology without going through a middleman (tbDEX, 2021). 

Afterpay

Block successfully acquired Afterpay Limited on 31 January 2022. A global “buy now, pay later” (“BNPL”) platform, Afterpay enables its retail merchant clients to provide their consumers with the option to purchase products and services on a BNPL basis, facilitating trade between retail merchants and end customers. Customers may purchase products they like now and pay for them later using Afterpay, which also helps retailers boost sales and order values. (The New York Times, 2021)

In addition to operating an online shop directory that enables customers to search for retailers that accept Afterpay as a payment option by product category, Afterpay also provides an in-store card for in-person transactions at a merchant’s point of sale. With Block’s intention of including the Afterpay BNPL platform into the Cash App and Square ecosystems, there is the likelihood of seeing an improved relationship between these ecosystems, extending access to more vendors and consumers and assisting in the growth of more commerce between sellers and customers. 

Revenue and Gross Profit

Block’s total net revenue for the full year of 2021 was $17.66 billion, an increase of 86 percent over the full year of 2020. With bitcoin excluded, its overall net income for the full year of 2021 was $7.65 billion, up 55% year over year. For the full year of 2021, gross profit was $4.42 billion, an increase of 62% from the full year of 2020 and 53% on a two-year CAGR basis. (Block Inc., 2022)

Block’s GPV reached $167.7 billion during the full year of 2021, an increase of 49% from the full year of 2020. 

For the full year of 2021, subscription and services-based revenue increased by 76 percent year over year to $2.71 billion, while subscription and services-based gross profit increased by 69 percent year over year to $2.21 billion. (Block Inc., 2022)

On a two-year CAGR basis, bitcoin revenue and gross profit grew by 232% and 285%, respectively. Bitcoin revenue and gross profit benefited from year-over-year increases in the price of bitcoin and the number of bitcoin activities. For the full year of 2021, Cash App generated $10.01 billion of bitcoin revenue and $218 million of bitcoin gross profit, up 119%and 124% year over year, respectively. In the future, bitcoin revenue and gross profit will undoubtedly experience significant changes due to variations in customer demand and the volatile nature of bitcoin.

Strategies for Growth

Block wants to consolidate all corporate data and utilize it to automate the function of a CFO for its merchant-focused financial services. Block started collaborating with new businesses to increase its pool of possible borrowers. These collaborations serve as Block’s bridge to boosting its number of loans, gathering new kinds of company data, and strengthening its algorithms.

CB Insights (2018)

Likewise, a new interface between Block and TikTok was unveiled on 28 September 2021, which enables online vendors of all sizes to expand their consumer base. A simplified buying experience that maintains the appearance and feel of the Seller’s brand is made possible by Block x TikTok, which allows merchants to drive fans straight to products in their current Block Online store from TikTok videos, advertisements and shopping tabs on their profiles. This collaboration is observed by many in light of Block’s bid to be a top supplier of the diverse range of services that retailers require to manage and operate their businesses.

(Forbes, 2021)

Competitor Analysis 

Several Companies compete with Square in the FinTech space, such as PayPal, Stripe, Shopify and ShopKeep by Lightspeed. Nevertheless, by providing small and midsized businesses with affordable and effective payment processing technology, Square has grown its brand and developed the right products and services required to generate revenue in this industry, even in the presence of bigger rivals. 

Two of the most well-known and widely-used payment platforms on the market are Square and Stripe. Both businesses provide credit card acceptance without a minimum monthly revenue requirement or an application procedure, making it simple for small business owners to make payments. While Stripe is a developer-friendly platform for e-commerce, subscriptions, and other online payments, Square is best suited for in-person transactions (Forbes, 2022). 

Stripe is leading in most countries, including the United States, United Kingdom, Canada, France and 158 other countries. Square does not have a lead over Stripe in any country. Furthermore, Square is significantly behind Stripe in market share, falling short of them in every industry. Top 10K, Top 100K, and Top 1M sites are also all dominated by Stripe (SimilarTech, 2022). 

(SimilarTech, 2022)

Square and PayPal are fintech companies with payment processing systems that are frequently contrasted. While Square is creating a whole ecosystem to challenge traditional payment methods, PayPal is developing fintech products for businesses and consumers. PayPal and Square provide similar services; however, PayPal has a more significant international presence, a broader vendor acceptance, and more comprehensive e-commerce features. (YahooFinance, 2018)

Through Venmo and the PayPal app for users, PayPal provides various features. However, those two options fail to create a cohesive environment that would serve customers’ preferred financial services as Block does. 

Block is seeking to make the Cash App a platform that can sit at the core of a user’s financial life by adopting the same strategy for its consumer solutions as it does for its business services. It accepts direct deposits, enables the Cash App Card for purchases, and offers stock and cryptocurrency investing options. It would not come as a surprise if some of Cash App’s customers eventually switch away from regular bank accounts.

The performance of these two firms’ market caps, revenues, and gross profits during the last five years are shown in the chart below.  

It is glaring how Square is expanding more swiftly, even though PayPal is bigger and more profitable. In the long run, it would not be a shock if Block’s platform strategy causes the biggest upheaval in the fintech industry. 

Regulations and Fintechs

Expanding the range of services offered to consumers has changed the procedures, and channels businesses use to deliver their services. The entry of new (technological) service providers contributes to the disruption brought by technological advancement in the financial services market (FSB, 2017). The market structure has undoubtedly undergone significant changes as a result of these developments, as  Non-bank fintech players are currently highly active in providing services that were previously mostly provided by banks (Petralia et al., 2019)

However, for a long time, fintechs ran unregulated because they differed from traditional financial services in terms of creating deep customer connections, navigating market trends agilely, and creating disruption for traditional competitors. 

Unjustified differences in the regulatory requirements for various market participants interfered with banks’ capacity to operate as intermediaries, endangering systemic stability (FSB, 2017). Furthermore, unbalanced market trends favouring big techs endangered competition in the financial services sector, impacting consumer protection and market integrity (BIS, 2019).

The boundaries of financial regulations have not been generally altered since the development of fintechs in the bid to accommodate their operations as financial service providers. Though a few outliers are regulations on crowdfunding platforms and the adoption of the category of digital banks in some jurisdictions (Ehrentraud et al., 2020). 

Online lenders and other fintechs including Block, online lender Lending Club, and cryptocurrency exchange Coinbase, in 2018 pushed for regulatory pathways that would allow them to get beyond the maze of state and federal rules that regulate financial operations in the US. (New York Times, 2018)

In response to such requests, the US Treasury Department published a 222-page report on July 17, 2018, outlining the administration’s opinion on the regulation of nonbank financial enterprises (U.S. Department of the Treasury, 2018). That same day,  the Office of the Comptroller of the Currency, a national bank regulator,  unveiled a new type of charter that may exempt these businesses from the state-by-state approvals they previously required to offer loans and other financial products. (New York Times, 2018)

However, non-banks that provide financial services (payments, credit, crowdfunding, wealth management, investment advice) often need a license depending on their activities.

For instance, most prominent technology companies in the European Union and the United States possess licenses to operate as payment service providers, also known as payment institutions or e-money institutions in the former and money transmitters in the latter. 

Since the 2008 financial crisis, Know Your Customer (KYC), Anti-Money Laundering (AML), and Bank Secrecy Act (BSA) laws have continued to be modified and revised. KYC and AML laws aim to identify and prevent criminal activity such as money laundering, fraud, and funding of terrorist groups. Fintechs rely heavily on third-party software to keep up with demand, thereby exposing the privacy of their customers to greater risk; this makes regulation very important. 

Conclusion

In the payment processing landscape, Block is at the forefront, and whether it is providing cutting-edge payment and point-of-sale solutions to merchants or offering consumers an easy way to handle their financial transactions with its Cash App, it is safe to say that Block is a company that is disrupting the financial services industry. 

Block announced its launch of Square Banking in 2021, and it has the potential to become the go-to financial services company for small businesses worldwide. Block is expanding its payments ecosystem with strategic moves and is directly competing with the world’s largest fintechs. 

References 

Bank for International Settlements. (2019): “Big tech in finance: opportunities and risks”, Annual Economic Report 2019, Chapter III, June.

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