[U39] Block: Can 2025 Objectives accelerate its mission?
Scale the building blocks to help more people access the economy worldwide
Dear Readers,
In this Update for Product | Strategy | Innovation I will discuss what I see as core 2025 Objectives for a company that operates in a large addressable market estimated at $28 trillion by 2025 for global financial services. This company is Block, but was previously known as Square. This new name reflects an Ecosystem of “building blocks” including blockchain technology. Jack Dorsey is the CEO (now titled Block Head), board chair and co-founder of Block.
One of the most compelling attributes of the Block Ecosystem and its building blocks is the ability to define an addressable market based on current products, services and countries where it operates. These addressable markets can then expand incrementally as new products and services launch and new markets are entered. This is illustrated in the figure above for Block’s 2 core building blocks Cash App (green) and Square (blue).
Block has significant competition from both legacy incumbents and peer fintech companies. But Block pursues a mission and vision to enable more people to access to the global economy. Cash App concedes the top 1% with net worths over $10 million to the private banks. They even concede the top 10% with net worths over $850 thousand to an even larger network of financial service providers. Cash App is focused on the other 90%. But Square can target any size business even though more widely adopted among micro, small and medium-sized businesses. Square is the go to partner to start a new business or venture that requires processing credit and debit cards to close more sales.
Developing a 3-year Objectives for a company of interest allows me to dive deep into corporate communications and earnings reports to determine the growth drivers that will execute their mission. But the company must have a compelling mission and operate in a large addressable market to support scaling over many decades.
Summary
Square is the original core building block launched in 2010 with a focus on Sellers closing more sales by processing credit and debit cards. Square has evolved since then with specialized products for retail, restaurant and service businesses. Point of Sale (POS) systems range from simple to comprehensive hardware to address the needs for businesses of all sizes.
Block’s core mission is to increase access for more people to participate in the economy. That access spans individual consumers, business sellers, creators and developers and the ecosystems they represent. Micro businesses with gross receipts less than $250,000 use Square to close more sales with credit cards and digital payments. Block defines the 2022 addressable market for Square as $120 billion.
Cash App is the second core building block with a focus on individual consumers including those who are not adequately served today by legacy financial services. Sending or receiving money with another Cash App user often drives first us by downloading the App. Adding direct deposit, bill paying and a debit card makes Cash App function more like a bank. And buying stocks and Bitcoin adds the ability to store value beyond just a cash balance. Block defines the 2022 addressable market for Cash App as $70 billion.
Emerging building blocks include Tidal with its tools for creators and music streaming for music artists. These creators can also tap into the products and services provided through Square and Cash App. AfterPay is a building block that materialized within Block through the acquisition of Australian fintech AfterPay Limited finalized in Q1 2022. AfterPay provides the popular “buy now, pay later” (BNPL) feature with 4 equal payments paid over 6 weeks to help close more sales. This whole amount is interest-free if the payments are made on time.
The most recent building blocks within the Block Ecosystem enable hardware products and software services to drive key use cases around Bitcoin. Developers are a primary stakeholder with open-source tools in particular provided by Block-funded non-profit Spiral to build solutions enabled by the Bitcoin Network.
Spiral released the popular Lightning Development Kit (LDK) to help developers build a Lightning node with supporting modules to create payment systems, digital wallets, identity management and other use cases. TBD is an open-source platform for developers to build products and services on decentralized technologies.
Block held a recent Investor Day to showcase Square, Cash App, Tidal and the Bitcoin building blocks, ecosystems and vision for the future. But for this Update, I’m looking at the next 3 years with Objectives to drive growth and impact by the end of 2025.
There are 3 core 2025 Objectives with metrics to validate whether they are reached. These Objectives intend to drive revenue for Block as a fintech growth company. Block has also built internal intelligence around which cohorts of users to fund and launch specific programs to then measure return on investment in the years that follow. More granularity is needed with internal team Key Results to learn and iterate, but that is beyond the scope of this Update.
Scale Cash App to 75+ million monthly active users.
Scale Square to 20+ thousand (2%+) mid-market Sellers who represent $5 trillion in annual gross receipts in the US Market alone.
Launch an open-source hardware wallet to self-custody Bitcoin for mainstream use.
I will cover these 3 core 2025 Objectives in more detail over the following sections. 2022 has been a challenging year for tech companies. But Block has the products and services to drive significant value for many individuals and organizations. Block has demonstrated discipline to manage its pace of growth with intentional investments into specific innovations and market tests to validate outcomes meet key assumptions. Block’s CFO, Amrita Ahuja, is a key stakeholder in monitoring the return on invested capital for these initiatives.
1. Scale Cash App to 75+ million monthly active users
Drive growth with more Consumers adopting and actively using the Block Ecosystem.
Cash App reaches about 20% of the US population today and competes with Venmo, PayPal, Apple Cash, Google Pay and other digital payment tools against legacy financial services from legacy banks. Cash App has demonstrated the ability to acquire and drive meaningful engagement with consumers using promotional campaigns leveraging artists and celebrities. These influencers might give away $1 million in cash through Twitter to their fans who reply with their unique $Cashtag and how they would spend the cash. These promotions can become viral as they spread through a large network of fans. Tom Brady has 2.9 million Twitter followers. The influencer can also give away stock to their fans on Twitter who reply with their $Cashtag and hashtag like #SQ for the company ticker symbol, Block (NYSE: SQ).
With 1.) user growth, 2.) more cash inflows per user, and 3.) more monetization of these inflows, Cash App can continue to scale revenue exponentially. But user engagement is important to drive these outcomes with repeat use and preference to use Cash App vs. legacy financial services. Here are some key initiatives to achieve this Objective.
1a. Leverage and innovate unique Cash App features to drive growth and expand addressable market beyond current $70 billion.
Block acquired the Australian company AfterPay earlier in 2022 to provide popular BNPL services to consumers using Cash App and Sellers using Square. A superior AfterPay consumer experience through Cash App achieves 2 primary outcomes. First, Cash App use will increase to utilize this new feature. Second, a Cash App user equipped with AfterPay provides a key benefit to Sellers using Square. Consumers using AfterPay spend more on transactions using 4 payments with no interest instead of cash or credit card payments.
AfterPay is particularly popular with Gen Z and Millennial consumers who are also the largest demographics on Cash App. So promotions to target Gen Z and Millennials cohorts should showcase and incentivize AfterPay adoption. This could also be coordinated with promotions to Sellers of interest to these cohorts who also adopt AfterPay on their Square deployment for a superior end-to-end experience between Consumers and Sellers.
Innovative “borrow” features will also be of interest to Cash App users as gaps materialize between income and expenses during inflation. Creative promotions for specific items or services could help Cash App users who meet loss-prevention criteria with inflow and spending history receive key benefits from specific Square Sellers. Meaningful integration and innovation between the Cash App and Square ecosystems will be critical over the next 3 years to drive key results toward this Objective to reach 75+ million Cash App monthly active users by 2025.
1b. Leverage AfterPay consumer base to expand Cash App cost-effectively in international markets.
AfterPay was founded in 2014 and launched as a service in key international markets like Australia, New Zealand, United Kingdom and Canada in addition to the United States before the Block acquisition and is a desired service in even more international markets. AfterPay has 3.5 million users in the U.S., 3.1 million users in Australia and New Zealand and 600k users in the U.K. reported in 2020. Thus, AfterPay is a strategic asset for Cash App to expand internationally. First, Block should promote and incentivize Cash App adoption among AfterPay users where both products are already live. This allows AfterPay users to get even more benefits through Cash App they do not receive through AfterPay alone. And Block should promote and incentivize AfterPay adoption among Cash App users.
Block should also prioritize international expansion into new countries using AfterPay as a lens to plan how to drive Cash App adoption using the combination with AfterPay in target countries for target cohorts. Millennials represent about 75% of current AfterPay users. These products and services do require the proper regulatory framework to enter a country using centralized financial systems.
Decentralized financial services for both Cash App and Square once available through Block’s work on Bitcoin-standard payment systems could make AfterPay available where the proper regulatory framework doesn’t exist for more conventional deployments. This could accelerate international expansion through third-party developers who create unique solutions for specific markets like countries in Africa who need better solutions to build out solar power between an operator and home owners.
1c. Launch and scale cheaper and faster remittances to an estimated 1 billion global remittance users who send and receive an estimated $700 billion across borders every year.
Remittance of funds from immigrants working in the U.S. or other developed countries back to family member, friend or business in a home country like El Salvador or Nigeria is a huge industry. And conventional financial services from companies like Western Union charge substantial fees and take time to make the funds available. This can be streamlined with a decentralized, open, payment system. Cash App can already send money peer-to-peer between its users, but Cash App is not available in many countries to support the receipt of funds.
Block is building open-source software through its non-profit building block Spiral and separate building block TBD to facilitate developers building open-source remittance solutions. This allows a Cash App user in the U.S. to send funds instantaneously to a family member in another country with only the need to have a supported digital wallet in their country. TBD announced a recent partnership with Boston-based Circle to collaborate on USDC stable-coin projects. This would allow digital USDC tokens secured 1:1 by US dollar reserves to be exchanged between users across borders. And Circle and Square could also facilitate business-to-business transactions across borders using USDC. This could help Square Sellers work more effectively with international supply chains.
2. Scale Square Ecosystem with 2%+ of mid-market Sellers
Drive growth in a key Seller segment representing over $5 trillion in gross receipts in the US market alone. Mid-market businesses can leverage more Square products & services and drive significant revenue beyond micro and small-to-medium sized businesses.
Micro businesses represent about 17.2 million U.S. Sellers with gross receipts less than $250k and totaling over $500 billion annually for this business segment. These were early adopters for Square with 13% of this segment active in 2021 on the Square platform reported in the Square presentation at the recent 2022 Block Investor Day. 13% of this segment would represent about 2.2 million U.S. Sellers with $65 billion in gross receipts.
Small-to-medium sized businesses (SMBs) represent 2.9 million U.S. Sellers with gross receipts between $250k to $1 million and totaling $1.3 trillion annually for this business segment. Square penetrated 4% of the SMB market in 2021. 4% of this segment would represent about 110 thousand U.S. Sellers with $52 billion in gross receipts.
But mid-market Sellers are an even more strategic business segment with over $5 trillion in total gross receipts annually. Square has only penetrated 0.5% (about 50k active on Square in 2021) out of 1 million Sellers in this business segment. Gross receipts for the mid-market segment range from $1-100 million annually. Each 1% penetration of this key business segment represents over $50 billion in gross receipts. And success in the mid-market segment can eventually lead to alpha deployments in the Enterprise segment to learn and iterate towards larger beta deployments.
2a. Leverage and innovate unique features to drive growth in mid-market segment (gross receipts range from $1-100 million annually)
Square already has many products and services well-suited for mid-market Sellers. These include team management and payroll services, point of sale systems, commercial loans, e-commerce services, loyalty programs, email marketing and other key solutions. The advantage for Square deploying to this mid-market segment is the size of these businesses makes a broader range of products and services even more attractive. So these deployments are a win-win for both sides.
The mid-market segment may also need enhanced features and new products and services to drive adoption or scale deployments across multiple sites. Some of this work might be limited to this segment, but most of the work can likely be repurposed in other segments to help drive cost-effective revenue growth. The mid-market consists of 2 sub-segments. One is smaller with gross receipts of $1-20 million and the other larger with $20-100 million. These sub-segments will likely have different needs based on differences in their scale.
Team management, payroll and loyalty programs can drive inflows and sticky user experiences between Cash App (employees, customers) and Square (Sellers). As more integration occurs between the Cash App and Square building blocks, the net effect is a user experience that becomes more unique to the Block Ecosystem. That can drive even stickier user experiences and loyalty to Block.
2b. Leverage AfterPay Seller base to cost-effectively grow Square Ecosystem upmarket and expand internationally
BNPL is a financial service delivered by AfterPay that is popular with consumers transacting business at companies of all size. This is a key asset to drive adoption of Square with new accounts that are upmarket in the mid-market and large enterprise segments. Block reported Square and AfterPay Sellers saw more than 61 million transactions over the recent Black Friday through Cyber Monday weekend.
AfterPay also has existing Sellers that serve as warm leads to introduce and adopt Square services. This is particularly attractive as mentioned above when Cash App, Square and AfterPay drive better and stickier consumer experiences at Square Sellers. The combination of all 3 of these building blocks can also accelerate expansion into international markets with a more attractive business case to invest capital.
2c. Leverage AfterPay to drive incremental sales for Square Sellers
AfterPay is strategic asset for Square and its Sellers because consumers spend about 300% more when BNPL is offered. This leads to more revenue for both and value for Cash App users. Square, AfterPay, Sellers and participating Brands can co-market specific items in the store like electronics, clothing, accessories and shoes that do particularly well with AfterPay.
Cash App Boosts are also an opportunity to drive awareness of key products or services among Cash App users with participating Sellers. Twitter and other social media can also be used to build a sales channel linking Square, AfterPay and Sellers to special promotions. For example, a restaurants could showcase a special prix fixe tasting menu and wine pairing on specific nights at specific times and tables. This can be a very special occasion for a birthday or anniversary, so the BNPL option could be attractive with Consumers. This is attractive to the restaurant because it drives higher ticket prices.
3. Launch a Hardware wallet to self-custody Bitcoin for mainstream use
Advance open-source products and tools for developers to build decentralized financial services. Drive meaningful innovation within and between the Block ecosystems.
The recent FTX bankruptcy highlights potential risks when custody of digital assets is held on a centralized exchange. Digital wallets facilitate payments and the transfer of digital assets with another user, but unless you self-custody the keys to a digital asset on a Hardware wallet, these assets are not truly secure.
But self-custody also presents a risk if the private keys to authenticate a transaction are lost. If this happens, you can lose the digital assets in this case, too. Block is tackling both issues around custody of digital assets with the design of open-source hardware and software. A key requirement is the solution must be suitable for mainstream use by both tech and non-tech users.
Block has assembled 3 building blocks so far to realize a Bitcoin ecosystem. One is focused on developing open-source hardware, another called Spiral is building open-source software tools to support the Bitcoin developer community, and a third called TBD is building decentralized solutions.
But this isn’t just about Bitcoin. Block is building out open-source decentralized protocols and blockchain-enabled technology through developers to enhance the customer experience within the other ecosystems focused on consumers, creators and sellers. And even more important, unique experiences will be developed between Block’s ecosystems to enable solutions like a loyalty program between Consumers and a Brand championed by a Creator for a network of Sellers.
3a. Design and commercialize open-source Hardware Wallet to self-custody Bitcoin
Mainstream use of hardware wallets requires simplifying multi-signature authentication used in current systems to secure transactions. Block has designed 3 sets of keys. One set is associated with a mobile app wallet. A second set can be stored on a secure Block cloud service. Transfers under a limited amount can be done with just these 2 sets of keys using the mobile app. A cash balance and Bitcoin can also be stored on this mobile app.
But if a transfer exceeds the limited amount or the user wants to self-custody Bitcoin, a third set of keys are required from the Hardware Wallet to authenticate a transfer. This can include self-custody with all 3 sets of keys. An analogy would be moving money from a checking account to a physical safety deposit box for more secure “storage”.
Secure, mainstream self-custody of digital assets on a hardware wallet combined with a mobile digital wallet are critical tools to build decentralized financial services. Recovery is also important through Block while maintaining security. Block will offer these tools, but the open-source designs allow other companies to add to the ecosystem, too.
3b. Design and commercialize open-source hardware and software to improve access for Bitcoin mining for sustainable energy projects.
Bitcoin mining requires very specialized ASIC computer chips, hardware and software. There are a limited number of vendors who sell the equipment with proprietary technology to differentiate. This drives up cost as the computing requirements keep increasing.
Bitcoin mining is energy intensive, but it is an ideal co-located “load” to kick start and help fund renewable energy projects. Once the infrastructure is built out to connect the renewable energy source to the utility grid, the Bitcoin mining can be reduced or shut down to allow the renewable energy to meet a peak demand on the utility grid.
When state-of-the-art Bitcoin mining equipment is readily available through a network of viable suppliers, this also helps keep mining decentralized with new entrants leveraging cleaner & cheaper sources of energy like hydropower, nuclear, solar, wind and battery storage.
3c. Design and commercialize open-source decentralized identity verification to improve access to financial services.
TBD was formed by Block in 2021 to develop open-source, permissionless, decentralized financial services. These services will support a number of uses cases. The $700 billion global remittance opportunity already mentioned for cross-border fund transfers is one use case. Cash App and Square will also likely participate in this initiative.
Decentralized identification (DID) is an important feature for these services to operate without a centralized registry or exchange. A DID refers to any subject (examples: a person, organization, thing, data model, abstract entity, etc.) as determined by the DID controller. DIDs enable verifiable, decentralized digital identity. TBD is collaborating with the World Wide Web Consortium (w3.org) to help develop an open standard for DID.
Decentralized exchanges, also known as DEXs, are peer-to-peer marketplaces where financial transactions are possible without an intermediary or custodian. DIDs enabling DEXs and digital wallets will likely build the core infrastructure to decentralize emerging financial services over the next decade. This will not only provide access to the economy for more people, but also help to secure these services. Block will play an important role in advancing this technology through its TBD building block.
Conclusion
Block is a leading fintech provider pursuing the $28 trillion addressable market for the global financial services industry. Block has defined the products, services and countries for a $190 billion addressable market combined in 2022. However, with incremental organic expansion and M&A activity like the recent acquisition of AfterPay, Block expands its addressable market incrementally over time.
Q3 2022 revenue was $4.5 billion, but more important, subscription and services segment revenue with 81% gross margins grew 71% year-over-year to $1.2 billion. The gross profit for Cash App grew 51% year-over-year to $800 million and Square grew 29% year-over-year to $800 million. Block invested $500 million into product development out of $1.6 billion in operating expenses to support future growth. Block invested all gross profit back into the company for future growth and generated a $49 million operating loss in Q3 2022.
Block plays a key role to advance financial services technology while also enabling more people to access the economy. That means providing users including the unbanked with cost effective ways to receive direct deposits, pay bills, start a business and avoid expensive payday loans. Cash App also provides the tools to send and receive money plus buy and sell stocks and Bitcoin.
My 2025 Objectives covered in this Update highlight how Block can drive growth through its 2 primary building blocks: Cash App and Square. Leveraging the recent AfterPay acquisition will be key to realize the first 2 Objectives. A third Objective is to launch a Hardware wallet for mainstream self-custody of digital assets by ordinary, non-tech users. This will enable a number of decentralized products and services to be built by the developer community Block enables with a growing portfolio of open-source tools.
So, will these 2025 Objectives accelerate Block’s mission of providing more people access to the economy. I think so. These Objectives will strengthen the building blocks to enter more markets. And the open-source tools developed with enable other organizations and developers to build on what Block can do on its own. Decentralized systems can be widely distributed. Improving global remittance alone could impact up to 1 billion individuals with many of those gaining more access to the economy with fluid, cost-effective transfer of money and other assets by families across borders.
Best,
Stephen
I’m long Block (NYSE: SQ) mentioned in this post. Nothing in this post is intended to serve as financial advice. Do your own research. The opinions and views expressed in this newsletter are those of the author. They do not purport to reflect the opinions, views or policies of any other organization, company or employer.