Technology, Banking, Value Creation, and the Power of Aligned Incentives
Banks to Square about minimizing consumer transaction fees “You’re being stupid, you’re leaving money on the table, people are used to paying for these things”
Square to Banks “Well, that’s probably why you only have 7 million people processing credit cards with you today, we think that number can go way way up”1
Today, Square powers sellers and buyers, and mixes the soup together to create an ecosystem. Within the ecosystem, they have continued to launch products and services across both the ‘seller’ and ‘buyer’ businesses that everyday business owners and individuals use in order to transact, borrow, spend, and everything in between. But before it all started, they got on the side of these customers and focused solely on empowering them.
In The Innovation Stack, Jim Mckelvey tells the story of how he and a ‘boy’ named Jack Dorsey started a company called Square. In 2009, when Jim was working as a glassblower, he could not accept a $2,000 transaction from a customer2. From this point forward, it’s apparent that the solutions Square set out to find were to solve the problem of an ordinary seller. As they continued to investigate issues in the broader payments industry, they found corporations using their leverage over smaller sellers to hike fees, a lack of competition, and an opportunity to disrupt one of the most important industries in the world economy.
This mentality became the north star of Square’s business model. For sellers, whether they are providing services such as lending or products such as point of sale systems; it is in their best interest to help sellers do more business, make more money, and run operations more effectively. Especially in the seller business, we see companies such as Shopify and Stripe leveraging this incentive alignment with sellers as a north star in their businesses as well.
For individuals and customers, Square also has a reason to be on your team. Cash App was originally created for peer-to-peer payments. Now whether you’re investing, transacting bitcoin, or whatever else, the more money you make, the easier you can spend, the more you save, the more value you get out of the service, and the more valuable you become for the service provider.
Product Led Growth
In terms of assessing their categorization as a product-led growth company, they are one of the very best examples I can find. If Product Led Growth = go-to-market strategy that relies on using your product as the main vehicle to acquire, activate, and retain customers then SQ = product-led growth.
A perfect example illustrating this point is by analyzing the relationship Square had with their sellers when the 2020 C19 pandemic struck. Not only did this hit most sellers hard, but it also hit SMBs that Square most commonly works within their core business like restaurants, family-owned brick and motor shops, and individual sellers.
When the faucet turned off for these businesses, that faucet turned off for SQ, and by being aligned with their sellers, they had no choice but to help them digitize their business. They launched new products and services to help sellers sell online, operate remote, book online, and more. They worked as hard as they could to support lending3and helped bridge to outside lending sources such as PPE. For individuals, if no one has money, the faucets turn off inside Cash App.
Because these stars are aligned, the thing that then matters to Square teams is keeping the ecosystem operational in a new environment, and not just in the short term; but forever. By navigating this crisis with their customers, making them operational in the new environment, and then allowing them to thrive in the new environment, they’ll increase retention, lower churn, and in layman’s terms; build a seller’s extreme loyalty with Square’s business. Jack talks about this in podcasts and Jim raves about this in his book. When Square helps a mom-and-pop shop to survive a crisis, rebuild in a modern way, and then actually expand business on the other end; they may run their business with Square for life.
For sellers, Square has been rapidly expanding its product and service offerings. Initially launching the first version of the Square reader in 2012, they have continued to develop further along to a robust point of sale that allows for customization across development platforms, seller categories, employee use cases, and more. Among their services, they initially launched Square Capital in 2014 and have progressed to just this month, officially announcing a charter to begin banking operations4.
Services perhaps are where Square finds the most intense synergy with their sellers. Their new twist on banking involves leveraging technology to offer these services to businesses and in turn, make them more effective as a whole. They need sellers to do well in the long run, so they have a reason to dig into small $7,000 loans that are less profitable for a traditional lender5. They then use seller data to help ease fees on the fly, create more accurate seller data stories (important for lending), and administer smaller loans more quickly. There is no understatement at the power of real-time seller data in a time of crisis or uncertainty (i.e. March 2020) for risk assessment, ability to manage volatility, and determining credit quality.
Launching almost a decade ago5 with peer-to-peer payments, Cash App was similar to Venmo. Today, the product is an extremely powerful tool. Before anything else, it blows my mind to think Steve Jobs introduced the iPhone just over a decade ago. An ‘App Store’ was a new concept, and now, it’s bizarre to imagine how much of the world’s GDP is created through the applications on that device. Cash App happens to be one of them and all the value that will be created on the platform is yet to be determined. This is an interesting idea to follow.
Cash App has an android version too, and yes those people are fine😉. As for the iPhone, for some Friday joy, I highly recommend watching even if you’ve watched it before (some live!🤯).
Today’s Cash App has a few different core features.
1) Peer to Peer payments
2) Cash Card (debit)
3) Personal banking / direct deposit
4) Transacting / storing Bitcoin
5) Investing in stocks / public equities
In every product, it seems to me that Ca$$$$$$h App has a reason to be aligned with the customer and the individual using it, people love it.
Today in the United States, many still go unbanked. Globally, it is an even larger issue. If the global expectation becomes having a smartphone to operate with other individuals and groups, mobile applications are available to anyone who has one. For many individuals, Cash App is the first bank account they’ve opened on their own, and for digitally native generations growing to need banking services, this is likely the first stop.
Easy access to a routing number and account number removes friction to add as a place to deposit for online use cases, linking with a local bank for internal transfers is accessible on the home page, and any necessary forms and documentation are always available on the web or mobile application. Personally, any service acting to service these banking functions that don’t offer all these things with almost no friction on a mobile app doesn’t even get consideration. From my perspective on a business’s mentality toward how they prioritize building technology, if the business didn't start with technology, they have hurdled those who did do not. (x100)
Boost + Cash Card
$ App then went on to add Boost. This product is great for getting something in return for using debit (traditionally hard to find). It is also a great example of a product that benefits from operating with both buyers and sellers. Relationships with sellers allow them to better Boosts and for individuals, it is an amazing bonus to debit. The Cash card pops right into Apple Wallet/Apple Pay, and before heading to spend I check to find things like 10% off a purchase from a grocery store, 10% back on the purchase price in bitcoin, and others like it🔥 There’s good reason to chuck a few bucks into $app even if it’s if you’re chuckin some boost in your life.
$ App then went on to add stock/public equity investing along with bitcoin buying/selling. Retail investing as a whole has been under fire as of late and I think it’s important to note a few things these products do really well for the people using these mobile application trading platforms. For starters, everyone has to start somewhere and we can all agree the first stock you buy isn’t supposed to make you filthy rich. From my perspective, even the most novice ‘investors’ understand this and overwhelmingly state this in their intentions on using mobile products and services.
This leads me to my next point, where every wealthy person in the world agrees the most important way to escape scarcity, build wealth, and find financial freedom is to build equity ownership. Everyone living in a capitalistic society should be an ‘investor’ in some way or another. One of the first taught principles in finance, ownership is a fundamental component of generating wealth. Among others, Mark Cuban has publicly outlined and supported a future where all employees have a piece of the business they’re working for. Technology is making this reality.
I strongly believe the average age where people begin to participate in the economy, begin accumulating equity, and are transacting value will continue to fall. What products and services will these younger generations choose to build their first stack of value with? What tools will young gamers, creators, or investors use to fuel their initial success? I think Ca$h App will have an important role to play.
As the most digitally native become the highest earners, it will be interesting to see how much Cash App users will generate using the app. As they continue to grow the number of people who buy their first piece of ownership in a business through $app, a mobile app, the number of people who will have a reason to seek finance education will also grow. This, out of all things, maybe one of the most important externalities coming from these platforms, and Cash App should be proud to contribute. How many people will buy their first piece of ownership in a business and feel its power? How many will make their first small investment mistake and learn from it? How many will make their first $1,000, $5,000, $10,000? The most valuable way to learn for me, or the only reason to learn for me, and the only reason to learn for many of us, came with a vetted interest and hands-on experience.
Defi, Crypto, Centralized Finance
With a rise in demand for decentralized finance, is there a place for centralized financial services?
Jack “I think the definition of a bank will evolve rather then tech companies becoming more like banks, and I think, you know, things like digital currencies and the blockchain change the definition as well, when you don’t have particular parties that control the currency or the gates, it requires a new definition”6
It’s important to note that there may be many blockchains that are relevant to our future. In a broader sense, the only constant in this space will be rapid change. Square and Cash Apps’ role in the equation is important, especially for the United States. It is more crucial than ever for the US to leverage relationships with its best and pioneering businesses to ensure regulation evolves for better rather than worse. If the United States can produce modern regulation it will fuel economic expansion, feed the future flywheel for crypto businesses starting in America, and will allow a smoother transition to an inevitably different future. With other countries, laser-focused on taking advantage of the next big leaps in technology, countries who are embracing these developments stand to gain.
The three growth objectives for Square7
1) Scaling both ‘seller’ and ‘cash’ ecosystems
2) Optimizing the products possible with the two endpoints
3) Connect the two ecosystems
Individuals, businesses, and investors should all be watching Square and Cash App. Out of all the things Square does well, I think they’ll prosper from the fact that when their customers do well, they have a reason to celebrate; and we all have something to benefit from.