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The FinTech force in commerce and consumer finance

Square (renamed Block) specializes in innovative payment hardware and software solutions for merchants as a payment aggregator and merchant acquirer. Through its Cash App mobile payment platform, Square provides financial services to consumers, including P2P, bitcoin and stock trading, and Cash Card, a Visa debit card. In August 2021, Square announced its intention to acquire the Australian company Afterpay for $29billion. Afterpay is a typical “Buy Now Pay Later” financial service company.

BNPL services, which allow consumers to split purchase payments into installments, exploded in popularity as Americans turned to online shopping during the coronavirus pandemic. Providers of such services charge online retailers a fee for each transaction.

Following an inquiry last year, the CFPB found that BNPL providers Affirm Holdings, Block's Afterpay, Klarna, PayPal and Australia's Zip Co originated a combined 180 million loans in 2021, totaling $24.2 billion, a more than 200% annual increase from 2019.

The CFPB in its report, however, said it was concerned these products could pose risks to consumers, highlighting a lack of standardized disclosures across the five companies surveyed and the potential for consumers to become overextended.

In particular, the CFPB said because BNPL providers do not give data to credit reporting agencies, lenders might have an incomplete picture of a borrower's liabilities, including BNPL loans with rival companies. 

Together with the economic weakness, this inquiry weighs on BNPL service providers such as Block that offer an integrated suite of hardware, software, and financial services to help merchants grow their businesses across physical and digital storefronts. That comprehensive offering sets Square apart from traditional payment processors, and it greatly simplifies commerce for merchants.

Block's disruptive approach to commerce and consumer finance has translated into strong financial results over the past year, in spite of macroeconomic concerns. Gross profit climbed by over 36% to $5.1 billion, and free cash flow surged by over 175% to $563 million. 

While the market valuation is down in an impressive manner (-65% YTD), shareholders should believe in Block’s business model. i.e., that it can maintain its momentum in the coming years, as management is executing on an ambitious growth strategy.

Specifically, Block plans to supercharge its Square and Cash App ecosystems by integrating both with Afterpay which could further boost profitability and reduce capital utilization ratios. The company’s current addressable market stands around $190 billion, and provided that the management’s strategy is executed well, it will be able to capture a sizeable chunk of this.