Payments

Should returning to core competencies be the playbook for Dorsey’s Block?

  • Block's overall decreasing revenues in Q1 and Q2 have made analysts wonder if the firm has expanded too broadly, too quickly.
  • All things considered, Block is establishing a network while having a futuristic approach – where everything is integrated through Square in a two-sided closed loop, bridging Square’s products for consumers and merchants.
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Should returning to core competencies be the playbook for Dorsey’s Block?

It all goes back to a stroke of bad luck with a credit card payment.

Placed into orbit in 2009 by entrepreneurs Jack Dorsey and Jim McKelvey, Block, the multinational technology conglomerate formerly known as Square, was almost named 'Squirrel' – until Dorsey had lunch at Apple. There he saw a point-of-sale system from a company named Squirrel Systems, which propelled him to go ahead with the brand name Square – derived from the company's square-shaped card readers.

The seed of Square was planted when McKelvey lost a sale because he couldn’t accept American Express cards. Irked by the high fees and struggle of accepting credit card payments, McKelvey partnered with his friend Dorsey to launch Square, a startup that would enable small merchants to accept credit card payments on their mobile phones. With no financial prowess or experience in the world of payments, they addressed the stumbling block through an entrepreneurial lens, while experimenting, innovating, and working their way up through early startup challenges, and chalking up widespread adoption from merchants small and large.

Today, Square is a financial services and mobile payments company that offers a suite of products, including point-of-sale hardware and software. Square renamed itself Block in December 2021 to better reflect the evolution of its business infiltrated with blockchain technology beyond the limits of its original credit card-reader business.

The company hosts a cluster of businesses under its umbrella. Among its primary products are a point-of-sale hardware system, software for payment processing and analytics, Square Debit Card for businesses, and Cash App, a P2P payments mobile app that allows money transfers among users and between users and businesses. In addition to mobile banking, Cash App also offers the option to purchase stock and Bitcoin through its platform and file taxes through its Cash App Taxes feature. The company also acquired a music streaming service, TIDAL – and an Australian BNPL provider, Afterpay.

Cash App, which originated as an elementary P2P mobile app, has been a huge money driver for Square. It wouldn’t be wrong to say that over time, Cash App has remodeled into a "payments super app" that offers a wide spectrum of debit cards, a Buy Now, Pay Later option, investing in equities service, Lightning payments, and crypto services – buying, selling, and holding Bitcoin, since the past four years. By 2021, 1 million Square users were buying Bitcoin for the very first time on Cash App – and nearly 5% of Square’s total cash was in Bitcoin.

But maybe the firm has expanded too broadly, too quickly. Analysts are beginning to think so.

“We would prefer if Block kept its focus on the core businesses, which are Cash App, Square, and now Afterpay. I think where the mistake was – at least in terms of the stock, and eventually revenue – has been the chase after Bitcoin. It feels like it has become a distraction from the core story,” said Ryan Coyne, senior associate, fintech equity research at Mizuho.

Headwinds from Bitcoin winter

Time and again, Dorsey has voiced his fanboy moments with the internet's native currency, Bitcoin. In his myriad of tweets followed by the Bitcoin 2021 Conference, he hasn’t shied away, going so far as to say, “Bitcoin changes absolutely everything. I don’t think there’s anything more important in my lifetime to work on.”

Over the years, Bitcoin’s integration into Cash App has worked well for the business. For instance, if users are trading, or investing in Bitcoin, they're more likely to open their Cash App – the more frequently it is opened, the chances of consumers using some of the other traditional financial services that offer cash out increase as well. 

Dorsey stepped down as the CEO of Twitter in November 2021 to go all in on crypto — and give undivided attention to scale up an intertwined framework comprising Block and Bitcoin. However, it appears Dorsey’s cherished child has led to a distraction for the company’s roadmap. The 2022 crypto winter that plunged Bitcoin's price from $68,000 in November’21 to $23,000 this August – has had a frosty effect on Block as well. This came into sight when the overall revenue of the company dwindled in its second-quarter earnings report this year.

Analysts are questioning the strategy behind Square’s approach to service Bitcoin for the sake of it rather than to limit its integration into Square's core products only – owing to the huge area of uncertainty it brings for the business.

“We like crypto and Bitcoin as engagement drivers for the Cash App. Where we may disagree a little bit is the company trying to build an entire network based on Bitcoin. Bitcoin and crypto should be one small piece of a bigger puzzle for Square, not the sole focus piece,” argued Coyne. 

It seems investors are trying hard to look on the bright side by keeping faith in Block to refocus on its core businesses – and within those core businesses, focus on profitability. The company seems to be aware of the situation, and according to their last earnings call – amid slowing revenue and investors’ demands, they may put efforts in that direction moving forward.

Moreover, to be on the right lines, the part that investors think has plenty of upsides and are keen to see the company working on is its new product velocity, particularly within the Cash App – with more products launching into the digital wallet within traditional payments rather than Bitcoin and other cryptocurrencies, according to Coyne. 

The Afterpay hiccup

In 2021, when Block acquired leading BNPL player Afterpay, Block’s projected growth was 70%, which was cut down to 25%-30% because of the Afterpay premium later on. Additionally, Block reported a $204 million net income loss in the first quarter this year, $42 million of which was due to Afterpay-related transactions and integration expenses.

Earlier, during the briefing on third-quarter earnings of 2021, Dorsey put forth how Block’s longer-term strategy was focused on linking the Cash App with its payment business, Square – and how the company thought Afterpay would serve the purpose of the line connecting the two points.

Currently, the market is going through turmoil, with high inflation and slowing economic growth – meanwhile, Block is one firm that is not only experiencing this but is also trying to get the better of the $27 billion purchase of Afterpay amid the upheaval.

Despite the recent BNPL share market downturn, and almost a year after his company agreed to acquire Afterpay, Dorsey is still bullish on the deal. In what was the largest deal in Australian corporate history, Square foresaw a big upside in the Afterpay integration that would introduce discovery and shopping to build on the elements that Cash App has already created around commerce. 

“This really gets at the heart of exactly why we made the acquisition of Afterpay in the first place – because we believe that Cash App ultimately can drive a ton of discovery for merchants all around the world,” said Dorsey in Block’s Q2’22 earnings call.

A couple of weeks ago, Square integrated Clearpay (known as Afterpay outside the UK and Europe) directly into its ecosystem in the UK, providing access to the BNPL feature to sellers across the region, online and in-person. This marks a turning point in the global integration of Clearpay following its acquisition by Block, and is a step closer to bringing Dorsey’s dream to life.

All things considered, Block is establishing a network while having a futuristic approach – where everything is integrated through Square in a two-sided closed loop, bridging Square’s products for consumers and merchants. For example, if a consumer taps to pay with her Cash App account to a Square merchant in a coffee shop, it would result in cutting out all the transactional costs in between the closed network. It might be a long road ahead, but this appears to be the objective for the company in the future. 

“They have the talent, the products, the vision, and a huge user base. They've done the hard part in acquiring customers who are highly engaged. There's no dire situation for the company – it's just about monetizing those customers and returning to their core competencies,” advised Coyne.

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