When it was founded as Square, Block (SQ +3.02%) was centered on enabling small merchants to accept card payments. Large financial institutions found this corner of the market not really worth serving, and Block took advantage of the opportunity.
Today, the merchant-facing segment, which is called Square (confusing, I know), is a major part of the overall business, generating 47% of company gross profit in the latest quarter (Q2 2023 ended June 30). This figure was up 18% year over year, so it's still growing at a healthy clip.
However, shareholders can't ignore the burgeoning Cash App ecosystem. Here's why it just might be Block's most critical segment.
A bank in your pocket
Launched in 2013, Cash App allows consumers to handle a wide range of important financial services, like setting up direct deposits, sending money to friends, obtaining a debit card, and buying stocks and Bitcoin. It has 54 million monthly active users today, and it has been the top finance app in the Apple App Store for five years.
Cash App benefits from a network effect. Someone who wants to send money to or receive money from a friend is incentivized to sign up for the service. And as more people come on, the network only becomes more valuable to everyone else. Peer-to-peer volume totaled $58 billion in the last quarter. And compared to other banks, Cash App's customer acquisition cost of $10 per user is extremely low, a clear indication of its network effects.
Moreover, Cash App might also have switching costs. For some consumers, the basic financial services that it offers might be enough that they don't need a traditional bank account. And once someone builds habits around their banking provider, they are probably unlikely to go elsewhere.
Looking at the bigger picture, the leadership team is extremely optimistic about the ecosystem's prospects. They believe that Cash App is staring at a $70 billion total addressable market (from a gross profit perspective). This means that the segment's 2022 gross profit of $3 billion indicates plenty of growth potential in the years ahead.
NYSE: SQ
Key Data Points
Success of the Cash Card
Besides Cash App being a meaningful contributor to financial success for Block, there's a single product in particular that stands out. Introduced in 2017, the Cash Card is a free Visa-branded debit card that connects to the balance in one's Cash App account. Consumers benefit not just by having a convenient method of payment, but by the ability to take advantage of instant savings, so-called Boosts, at various merchants.
In March, Block reported that there were 20 million monthly active cardholders, an increase of 34% from the year-ago period. It's also encouraging that a greater percentage of overall Cash App customers are signing up for the Cash Card. This percentage, known as the attach rate, was 38% in March. From a strategic perspective, getting more users to sign up for the debit card only strengthens their relationship with Cash App, which can lead to greater stickiness and revenue potential.
And from a financial angle, it's clear why executives hope that the Cash Card continues gaining broad adoption. Anytime a user swipes their Cash Card where Visa is accepted, Block acts as the issuing bank, which means it collects the interchange fees that a merchant must pay. It's even more lucrative if someone uses a Cash Card to check out at a Square merchant. In this instance, Block also acts as the merchant acquirer, likely making this the most financially rewarding transaction for the company.
With the potential to handle so many financial transactions, it's easy to see why Cash App is so important.
