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US payments firm Block has announced that it will downsize its presence in Europe to focus on "higher potential" revenue streams, as financials worsen for the loss-making fintech.
In its Q2 2023 earnings call, Block confirmed that Verse, its peer-to-peer (P2P) payments platform, will undergo a full wind-down throughout the EU, exiting the market on September 13.
At the same time, Clearpay, Block’s European buy now, pay later (BNPL) brand, will withdraw from France, Spain and Italy after August 25.
Jack Dorsey, co-founder and CEO of Block, said the downsizing is part of a wider strategy to cut costs while continuing to drive customer acquisition.
“These brands required significant investment, and they have not seen the growth and profitability we had expected over the past several years,” he said.
“We see an opportunity to shift these resources towards strategic areas that have a higher potential return on investment.”
Dorsey added that due to Block’s “investment discipline”, it will be increasing its profitability expectations for the remainder of 2023.
However, based on this year’s earnings so far, Block is still on course to close 2023 with its second annual loss in two years.
In FY 2022, Block’s net loss was about $540m, marking the company’s first loss-making year since 2018.
Bets that didn’t pay off
One of the biggest place-markers in between those two points was in 2021, when Block acquired Australian BNPL firm Afterpay for $29bn (Afterpay was already known as Clearpay in Europe prior to the acquisition).
When the deal closed in January 2022, Block said the acquisition would further its existing priorities for the Square and Cash App ecosystems — Block’s two main revenue segments.
The aim was for Square and Afterpay to enable “sellers of all sizes” to offer BNPL at checkout, and for Afterpay users to manage their BNPL instalments via Cash App.
After closing the acquisition, Square launched its first integration with Afterpay, providing Afterpay’s BNPL functionality to sellers in the US and Australia that use Square Online for e-commerce.
Also in January 2022, Spain became the fourth European country where Square had launched its merchant service tools, after France and Ireland in 2021 and the UK in 2017.
But with the closure of Clearpay in France and Spain, the aim of cross-selling Square alongside BNPL to merchants in those markets has now been scrapped.
Block’s loss, PayPal’s gain?
The withdrawal of Clearpay from three major European markets is likely to benefit rivals such as PayPal and Klarna.
In Q2 this year, PayPal sold its entire European BNPL loan portfolio to private equity firm KKR, alongside up to €40bn of future BNPL loans originating in the UK, France, Germany, Italy and Spain.
PayPal said it expects to pocket $1.8bn in initial proceeds from the agreement, and will reduce the cost of handling all but the consumer-facing side of its BNPL business, PayPal Pay Later.
The move means that PayPal retains its BNPL footprint in Europe and can continue to acquire new merchants and build on its existing ones.
By doing so, PayPal is effectively delivering what Block had set out to do through its proposed integration of Square services with BNPL functionality.
Last month, for example, PayPal unveiled its first major BNPL integration in Europe since the KKR deal, in the form of exclusive BNPL agreements with Microsoft in the UK, France, Spain and Italy respectively.
In Block’s Q2 quarterly results, the company acknowledged that it will face similar competition in future.
“Existing competitors and new entrants in the BNPL space have engaged in, and may continue to engage in, aggressive consumer acquisition campaigns, may develop superior technology offerings, or consolidate with other entities and achieve benefits of scale,” it said.
“Such competitive pressures may materially erode our existing market share in the BNPL space and may hinder our expansion into new markets.”
Verse becomes a drain on Block
The closure of Verse throughout the EU also follows a similar pattern of failing to gain traction.
In Block’s Q2 2023 earnings report, Verse is mentioned only twice, and only to downplay its significance within the Cash App ecosystem.
At present, Block's Cash App is available only in the US and the UK, but Verse, a similar platform, was available throughout the EU.
In 2020, when Block acquired Verse for an undisclosed amount, the platform had more than 500,000 registered users.
But in the Q2 earnings report, Block disclosed that inflows from Verse active users are “not material” to overall inflows into the Cash App segment of the company.
Writing to customers, Verse said it understands that the closure “may come as a surprise”, but wanted to assure customers that their funds are safe.
“After an extensive evaluation process, we have been unable to identify a sustainable path for Verse that allows us to continue to grow while delivering the level of service and innovation that our customers expect and deserve,” the company said.
In March, it should also be noted that Verse was hit by a €280,000 fine from the Bank of Lithuania for anti-money laundering (AML) failures.
Following an investigation, the Bank of Lithuania found evidence of “gross and systemic” violations of AML and counter-terrorism financing rules, and ordered Verse to rectify the failures identified by October 1 this year.
The breaches included failure to verify customer identities and failure to identify the nature and purpose of customers’ business activities.
According to the Bank of Lithuania, basic customer identification practices were overlooked by Verse, leading to the opening of accounts for anonymous users and users with “obviously fictitious” names.
