Block: merchant payments innovator struggles to defend home turf 

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Thirteen years ago, Square disrupted payments processing with a simple dongle that merchants could attach to smartphones and tablets to accept card payments. The device, a small white square card reader, was then an instant hit with small businesses keen to cut costs.

Today, Square (now called Block) is more than a niche payment processor. Co-founded by Jack Dorsey, it has a market valuation of $27bn, operates an FDIC-insured bank and offers stock and cryptocurrency trading. It also owns Jay-Z’s music streaming service Tidal and buy-now-pay-later provider Afterpay.

The corporate name change to Block underscores Dorsey’s crypto ambitions. But the group depends upon Square’s profits. The unit handled $186.5bn in transactions last year, up from $6.2bn in 2012. It accounted for more than half of Block’s gross profit last year even though it generated less than two-fifths of group revenue.

But Square no longer has first-mover advantage. Payment processing has become a commodity. Instead differentiation lies in software, offering more point of sales (POS) tools for, say, employee payrolls. Rivals such as Toast and Fiserv’s Clover have taken share with such offerings.

Shares in Block have fallen 43 per cent since July. The abrupt departure this month of Alyssa Henry, head of the Square unit, hints at the challenges.

Profit margins at Square are twice those at Cash App, according to Mizuho. But Square’s growth is slowing. Transaction volume at Square increased just 12 per cent in the second quarter, down from the 25 per cent rise a year earlier. Toast, which specialises in restaurants, reported a 38 per cent year-on-year increase on this measure. 

Square’s stature has grown following short seller claims over the quality of user numbers on Block’s Cash App. Its consumer business competes with big rivals such as PayPal’s Venmo. Renewed focus on Square’s POS business — and less time on bitcoin — is a better way for Dorsey to spend his time and shareholder money.