Friends With Benefits: Block Outlines Plans To Bring Consumer And Merchant Customers Together

May 19, 2022
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Jack Dorsey, founder and CEO of Block, formerly known as Square, has outlined how its multi-ecosystem approach can be brought together to the mutual benefit of both its merchant and consumer base.

Jack Dorsey, founder and CEO of Block, formerly known as Square, has outlined how its multi-ecosystem approach can be brought together to the mutual benefit of both its merchant and consumer base.

On Wednesday (May 18), Dorsey spoke at Block Investor Day, a five-and-a-half hour live-streamed event that coincided with the release of Block’s Q1 2022 results.

Following Block's acquisition of music streaming service Tidal and buy now, pay later (BNPL) firm Afterpay, Dorsey said it has become difficult to pigeon-hole his company to a single category.

Instead, the former Twitter CEO suggested that Block is now more of a hybrid fintech, seeking to build “an ecosystem of ecosystems.”

When Dorsey founded Square in 2009, he said its sole purpose was to make a card reader that anyone could use with a tool they already had: their mobile phone.

Over the years, Block has expanded its merchant services to include terminals, point-of-sale software, customer and employee management services, a debit card, banking tools, loans and a developer platform.

In other words, the goal shifted from helping merchants to process sales to helping them make more sales.

“If they grow their business, we grow our business,” said Dorsey. “It’s the perfect virtuous circle.”

In 2013, Square launched its next venture, Cash App. Like Square itself, Cash App initially had only one goal: to help users move money using the simplest way possible, which at the time happened to be email.

Facing the challenge of monetising Cash App, the product ultimately evolved into an e-money wallet with other functionalities, such as direct deposits, a Visa debit card, a bitcoin exchange, fractional stock purchases, taxes, lending services and an instant rewards programme.

“Once again, we could scale to whatever job someone needed us to do, taking all the complexity away from getting these services from multiple vendors by putting it all into a single app,” said Dorsey.

“And once again, we got to an ecosystem of services that all work together, this time for a different audience: consumers.”

Building competitive advantage

Although Block’s core revenues come from its merchant customers, a key part of its proposition to merchants is its ability to connect them with an active consumer base.

Through developing parallel services for both consumers and merchants, and connecting them, Block aims to create an ecosystem that offers mutual benefits to both sides.

As VIXIO previously reported with regard to Klarna, offering a full range of services and a seamless, frictionless payments experience then becomes a vital market differentiator to attract the right kind of consumers.

The more consumers that use Block’s Cash App, Klarna, PayPal or any other wallet or fintech app, the more attractive they become to merchant customers.

For example, this was a crucial reason behind Block’s purchase in 2021 of Australian BNPL provider Afterpay.

Eyebrows were raised at the $29bn acquisition fee, but at the time many argued that it was a move that Block had to make.

In an increasingly competitive market for merchant customers, a BNPL option is a must-have function for payment facilitators. Block’s key competitors, including PayPal and Klarna, all offer established BNPL services.

“It has relationships with buyers and sellers,'' Dorsey said. “It provides a new way for sellers to grow their sales and new discovery methods for people on Cash App.”

According to Amrita Ahuja, chief financial officer at Block, about 6 percent of Cash App users are also users of Afterpay, creating further opportunities for cross-selling.

In its Q1 2022 financial report, Block notes that 50 percent of Afterpay’s revenue and gross profit will be allocated to Cash App and Square (Block’s merchant-focused business, which still goes by the same name).

The report also notes that, since integrating Afterpay’s BNPL functionality with Square Online for e-commerce in the US and Australia, nearly 13,000 Square merchants processed BNPL sales in Q1, and Afterpay’s active sellers grew by 10 percent.

“The more connections between our ecosystems we create, the more resilience our overall company enjoys,” said Dorsey.

Bitcoin, Lightning and financial inclusion

One area that Block sees further potential competitive advantage is through the development of bitcoin-based payment options. In particular, through the use of the Lightning Network.

Block’s focus on the Lightning Network dates back to 2019, when it created a team of open-source blockchain engineers, and asked them to work on “whatever they thought best for bitcoin”.

The answer, they found, was in the Lightning Network — a second-layer solution that they believe has the potential to offer fast, cheap bitcoin payments at scale, something the bitcoin blockchain is unable to do.

It works by opening up direct channels between two or more bitcoin wallet addresses, so that transactions between them do not have to pass through the main blockchain.

Two years later, the company launched the Lightning Development Kit (LDK), a software suite designed to help developers integrate Lightning Network payments into bitcoin wallet and other crypto apps.

The LDK ultimately provided the tools that would be used to integrate Lightning Network payments into Cash App, a feature that went live in February this year.

“That's a success story I'm very proud of,” said Dorsey. “Building for the open ecosystem helped our company in the long term, and so we've decided to continue building in this way as we look to fill other gaps in the market.”

Continuing its focus on bitcoin, Block is also developing a bitcoin hardware wallet, a bitcoin mining system and another product called TBD — a developer platform for identity, trust and fiat-to-bitcoin on- and off-ramps.

“All of these will be open sourced by default, each with a complementary business model that Block can build for a new set of customers,” said Dorsey.

“We believe the bitcoin standard will become the internet standard, and by helping it become that, we will increase access to the global financial system and economy, and increase the potential of our business and the company.

“We are still very early, and we couldn't be more excited for what this will mean to the world.”

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