With two burgeoning segments under its umbrella, Square for merchants and Cash App for individuals, Block (SQ -0.49%) has benefited from network effects. Cash App becomes more valuable to its users the larger it gets, thanks to its peer-to-peer nature. And Square gains because of better integration with the Cash App ecosystem, as well as a rising Cash App user base that might favor shopping at these merchants.
But besides network effects, which are arguably the strongest source of an economic moat out there, this popular fintech stock benefits from another competitive advantage. Let's find out if this under-the-radar characteristic is enough to make Block stock a buy right now.
Making it difficult to leave
Another critical competitive advantage that Block benefits from is known as switching costs. Switching costs essentially boil down to how hard, burdensome, and disadvantageous it is for customers to stop using a company's products or services. In fact, customers often simply stick with the way things are, no matter how inferior the experience, so as to not disrupt the routine.
Banks are always a popular example here. While many individuals might complain that their primary financial institutions are slow, outdated, and difficult to work with, they are unlikely to switch to a competitor because of how ingrained that bank is with that person's life. Imagine having to move all of your accounts from one bank to another. A headache is forming just thinking about it.
Software providers are another good example. Think of larger corporations that use various software products. For example, they might use Microsoft Office for productivity tools, Amazon Web Services for cloud infrastructure, and Paycom for their payroll and human resources needs. You can quickly understand how painful it would be to change these service providers.
In Block's case, it is evident just how critical the company's products and services are becoming to its customer base. In a recent interview, CFO Amrita Ahuja highlighted how a higher number of customers within the Square and Cash App ecosystems are using more products than ever before.
"Square sellers who took on four or more of our monetized products made up 44% of our gross profit in 2022. It's up 15 points over three years," she said. This isn't surprising, given that Square provides a range of services for its users, like card payment acceptance, setting up loyalty programs, doing payroll, taking out loans, and managing staff shifts. As a small business gets larger over time, it's easy to see how it might need to use more of Square's offerings. In the most recent quarter (fourth quarter of 2022 ended Dec. 31), 39% of Square's $48.6 billion in gross payment volume came from larger sellers, a percentage that has increased in recent years.
Then there's the Cash App ecosystem. Cash App lets users set up direct deposit, send or receive money, buy stocks, buy Bitcoin, and sign up for a Visa debit card. "For Cash App, we now have five revenue streams that delivered $100 million or more in gross profit in 2022," Ahuja mentioned. Cash App now counts 51 million monthly active users, up 16% year over year. The Cash App Card, which accounted for 26% (up from 9% four years ago) of segment gross profit in the fourth quarter, has accelerated money inflows onto the platform, further providing greater potential for increased usage.
The result is that Block is becoming a fintech powerhouse thanks to its ability to raise switching costs for its customers. Over time, this can lead to better monetization for the company, and it reduces the likelihood customers will leave and use rivals' offerings. If investors needed any more convincing to consider buying the stock, you have it now.
