Hello to our 467 new subscribers that have joined this month! Excited to have you here. If you think you or your friends would enjoy this essay, we’d love for you to invite them to FTT!
Hi everyone! Before we get started, I wanted to add a new section to the weekly essay’s: playlists. If you know from when I wrote the Friday edition, I love making playlists. Now, I started something called Ian’s Weekly, where I pick a bunch of songs and make a little set (haven’t done this in years so go easy on me.) It’ll be updated automatically every week so Heart & save the playlist on Spotify if you like it!
For some reason I’ve been listening to Miley Cyrus’s masterpiece Party in the USA a lot (which you can skip but that’s lame), otherwise the rest of this playlist is pretty EDM heavy. I haven’t gone out in what feels like 15 years so please live vicariously through this week’s weekly.
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When COVID struck, everyone assumed small business lenders were doomed. I spoke to folks at most of the SMB lenders, and the sentiment was...confusing. It seems like they were trying to embrace the severity of the situation without having it affect their decision-making.
An unnamed executive explained to me that they’re all just trying to get past this situation and there would be very few survivors in the SMB lending space—turns out he was right. Kabbage got sold for $850m to American Express, a significantly better deal than the OnDeck-Enova $90m deal, which is so egregious that a newish shareholder lawsuit accuses the board of a breach of fiduciary duty.
But Square has been thriving—after a drop to $38.09 on March 20 amid COVID concerns, Square’s stock price has bounced back and has been ripping as of late (disclosure for whoever cares: I own ~$100 worth of Square stock.)
A lot of that in my opinion is due to the growth of Cash App during COVID. In Q2, Cash App accounted for:
$1.2 billion in revenue, 361% YOY growth
$281 in gross profit, 167% YOY growth
As of now has 30m active uses and $1.7 billion in deposits.
Those statistics imply that Cash App is one of, if not, the most popular consumer finance companies in the US.
This growth wasn’t by accident—Cash App has always been eons ahead of others when it comes to marketing. On top of that, I’d venture a guess that ads or marketing by Cash App has been more efficient just because of that behavioral shift.
Something I spend time thinking about for pretty much no reason is where can Cash App go from here. What advantages can Cash App leverage from Square’s assets around lending, merchants, and even its new industrial loan charter?
I think the answer here lies in e-commerce, an area of commerce Square typically hasn’t been too aggressive in. But with the future of e-commerce clearly seeing an inflection point, there is a way that Square can help their merchants—many of whom are retail store owners that use Square for its payment terminal—move their businesses online.
Square agrees, and they’ve already been doing it. Jack Dorsey talked about it in his earnings address:
“One in three new online sellers onboarded in the second quarter were entirely new to Square, and many of these sellers adopted other parts of our ecosystem, including in-person commerce. For example, the Coffee Tree Roasters in Pittsburgh joined Square by launching an online store, previously never having a website.
This quarter, they converted their five locations to Square hardware for their in-person point-of-sale system. We're also seeing an increase in contactless payment as customers don't want to use paper cash during -- due to COVID risk. In March, one in 12 of our sellers were cashless. And by the end of June, that shifted to one in four of our sellers operating cashless.”
“Square Online Checkout has been notable, so the businesses can transition online without building a complete website. Our online store has served very well as an acquisition tool for us…”
It’s working too—spending from online channels was up 50% this quarter, making up 25% of GMV now. That’s a great—and important—step for Square. It ensures ecosystem stickiness, which should improve merchant retention over time. They need these online tools to be robust enough, and seamless across previous systems, so that there’s no interruption in business.
Long term, this growth gives Square another potential untapped asset—the ability to become a payment method. If Square’s fast growing online checkout product continues to take off, Square can quickly become an e-commerce payment processor with not only a staple of fast growing merchants, but distribution to upsell that product to a plethora of physical merchants that aren’t seeing any business.
Here’s where Cash App comes in. One of the biggest issues in online, e-and-m commerce, is getting a user to input their payment info. Companies like Fast and Bolt have raised millions on this problem alone. The difference between Cash App and others is that Cash App is the underlying financial instrument. From a UX perspective, hypothetically Square can hypothetically use this to provision Cash App card data seamlessly for merchants. That gives them instant access to 30 million users that have $1.7 billion in assets.
From a revenue perspective it helps too. Processing payments is a costly product until you hit scale...but since a) Square has an extremely diversified business they can take a short term loss b) they’re monetizing through interchange revenue anyway for the transactions. Or, if you wanna thinking about more far fetched concepts, they can use this relationship between consumers, merchants, and the rails underneath to just become their own payment network, like Visa or Mastercard.
There’s a lot of potential to put lending on top of this; there’s clearly room for an installment product here. It could be one way that Square can drive users to something like this: use your Cash App at Square merchants for rewards through Boosts and installment plans.
If this sounds familiar, it’s because it sounds a lot like Shop Pay, Shopify’s payment method—which I just wrote about last week. Both are companies that have unique assets that they leverage for a cohesive and uniform experience. With Square, there are a lot of options right now to really build something unique. If I were there, I’d pitch this, but I’m sure with all these new products taking off, there’s plenty of other things Square’s busy doing too. But with a strong and growing consumer financial product and a burgeoning e-commerce processing product, Square’s solve an inherent chicken-and-egg problem payment processors have. The next step is to connect them.
