Block: Cash App Is Turning Into An E-Commerce Destination (NYSE:SQ)

Over the years, the mobile payments industry has become increasingly crowded and competitive, and industry participants have had to keep up with the latest fintech trends to stay relevant and avoid diminishing user engagement. Block, Inc. (NYSE:SQ) has been striving to penetrate the mobile payments industry with the launch of Cash App Pay, enabling users to purchase goods and services through the Cash App, and the acquisition of “Buy now, pay later” (“BNPL”) company Afterpay Limited. The ability to engage in commercial transactions through the Cash App has opened the doors for transforming the app into an e-commerce platform, creating an advertising avenue that is currently under-appreciated by the market.

Cash App Pay & Afterpay

As of September 2022, the Cash App had 80 million annual active users, buoyed by the broad range of financial services offered through the app, including the ability to purchase stocks and conduct tax filings. To keep users engaged, Block launched Cash App Pay in September 2021. While the firm entered the arena quite late relative to rivals like Apple Pay (launched in 2014), it has been able to leverage its existing merchant base to induce wide-spread adoption.

At launch, Cash App Pay was only “available to Square sellers as a software update, with no technical integration or new hardware required, creating a seamless onboarding experience.” The easy integration into the existing Square hardware/ software ecosystem makes Cash App Pay more appealing than other payment service providers for the Square merchant base. Block essentially benefits from already having a well-established merchant base to induce adoption of Cash App Pay seamlessly. As the Square merchant base grows, so does the number of sellers accepting Cash App Pay. The growing acceptance of Cash App Pay both online and in-store induces more people to explore Cash App Pay (and the Cash App more generally), thereby inducing a network effect. To further extend this network effect, Block expanded the accessibility of Cash App Pay beyond Square sellers in September 2022, bringing various brands like American Eagle and JD Sports into the network.

Amid the rising popularity of “Buy now, pay later,” Block made a big splash into the industry by acquiring Afterpay in August 2021. Users’ ability to pay in four interest-free instalments makes the Cash App stickier, enabling Block to better fend off competitive threats from the likes of Affirm Holdings, Inc. (AFRM) and Klarna.

The expanding acceptance of both Cash App Pay and Afterpay beyond the Square ecosystem yields benefits beyond greater processing fees. It will give Block insight into broader consumer spending and commercial trends across non-Square sellers (merchants that are currently not using Square POS / Square online). Such intelligence in aggregation could potentially be used to offer advisory services to the company’s own Square sellers, helping merchants make better business decisions amid evolving industry-wide and macro trends. Broader insight into what type of products/ services Cash App users purchase outside of Square network can also be used to inform ad targeting efforts to help merchants better market their products to relevant audiences (more on this later). The point is, the network effects induced by Block’s mobile payment solutions can also help make the Square ecosystem stickier.

BNPL services generally improve sales conversion rates and average order sizes for merchants, thereby enticing them to accept BNPL services as payment options. Merchants usually pay fees to BNPL providers in the form of a few percentage points (ranging between 3% and 6%) of the order value financed by the BNPL firm, in exchange for taking on the credit risk. Though increasing competition in the space has resulted in a price war among BNPL providers, pushing the merchant fees charged lower and lower.

Exactly one year ago, Klarna CEO Sebastian Siemiatkowski shared:

“I wish I could convince them to pay 6% but it was a long time ago that I heard any deal quoted at those levels.”

The downward pressure on merchant fees indeed subdues ROI potential for Block’s own BNPL venture through Afterpay. Amid concerns regarding diminishing pricing power, the industry’s monetization efforts are shifting towards transforming their mobile apps into e-commerce destinations.

E-commerce & advertising

To keep users engaged, BNPL apps are transforming into e-commerce destinations, encouraging merchants to list their brands inside these apps and get in front of users with high shopping intent. The increasing use of BNPL services to facilitate commercial activities gives these firms lucrative insights into users’ shopping activities. Subsequently, BNPL firms like Klarna are leveraging users’ purchase history data to create targeted advertising solutions, creating a new source of revenue for the industry.

Inevitably, Block has also embraced this e-commerce shift with the launch of its own “Discover tab” in the Cash App, which was rolled out in Q3 2022. On the last earnings call, CEO Jack Dorsey shared:

“We recently introduced the Discover tab in a Cash App. See this as a complete start. Our goal here was to introduce people to the concept, we’re not there yet, with the experience. Think of this as more of a search engine that we’re trying to optimize and iterate super-fast on to make sure that when people go there, they’re looking for something or we can display relevant content based on their location. And it gets more and more efficient, more effective, and ultimately leads to a purchase.”

The Discover tab will enable users with an explorative mindset to discover new brands and merchants, including those offering special deals and discounts. It will also entail a search engine, enabling users to look for specific types of products they intend to buy. Search activity through the Cash App enables Block to better target high-intent shoppers with more relevant and timely product ads. As a result, the company is on its way to creating lucrative advertising solutions.

Executives did not explicitly mention advertising ambitions on the last earnings call, though given that Block has followed the industry-wide shift towards e-commerce, it would only be logical for the company to also embrace the advertising route for optimum monetization of its payment solutions. Dorsey stated that they are “still early in [their] journey to transform Cash App into a commerce destination that bridges [their] seller and consumer ecosystems.” Nevertheless, as the Cash App develops into an e-commerce destination overtime, it raises the question over whether it will allow both Square sellers and non-Square sellers to bid for advertising on the Cash App. By restricting the accessibility of advertising solutions to Square sellers, or offering advertising solutions to Square sellers at more preferable rates, Block can encourage non-Square sellers to become Square POS / Square Online customers, enabling the firm to cross-sell its other Square commercial solutions. The ultimate success of this strategy would depend on how popular the Cash App becomes as a shopping destination relative to other rival apps. Though the introduction of advertising solutions would indeed create a new merchant acquisition strategy for the “Square ecosystem” side of the business.

Summary

The introduction of Cash App Pay and the acquisition of BNPL firm Afterpay have been essential for Block, Inc. to stay relevant in the fintech industry. Though amid intensifying competition diminishing merchant fees for BNPL services, the BNPL industry, and the mobile payments industry more broadly, has been shifting towards offering e-commerce services through their apps. Block is well-positioned to capitalize on this shift given its well-established footprint in providing various business solutions to the merchant community. The ‘Discover tab’ on the Cash App, particularly its search engine functionality, positions it well to attract high-intent shoppers and target them with relevant product ads in a timely manner. Hence, Block’s e-commerce endeavor through the Cash App offers a new revenue stream through advertising, improving the company’s ability to monetize Cash App’s large and growing user base.

Block, Inc. offers various merchant solutions including Square POS and Square Online, as well as multiple other Cash App services including stocks/bitcoin trading and banking services. Any investment decisions should take into consideration all these segments in aggregation. Given that this article focuses particularly on Cash App’s e-commerce ambitions, a neutral Hold rating will be assigned to Block, Inc. stock.