#1: Block is Trying to Fix Square
What happened?
Block reported its quarterly earnings:
Block delivered year-over-year improvement across all profitability measures in the second quarter of 2024, with the financial technology firm also raising its earnings outlook for the year. The company’s second quarter gross profit grew 20% year over year to $2.23 billion.
And the company used Thursday’s investor call to announce an internal reorganization designed to continue growth and accelerate go-to-market strength.
“We are moving Block to a functional organization, meaning an employee’s discipline (e.g. engineering, design, product, or sales), will drive who they report to and how they work. In line with this change, Nick Molnar, co-founder of Afterpay, will be elevated to be our Head of Sales across Block,” the company said in a statement.
So what?
There are a few interesting threads to pull on here.
First, it’s fairly clear from these earnings that Cash App, not Square, is the dominant growth driver within Block these days. The $1.3 billion in gross profit that Cash App generated for Block in Q2 represented a 23% year-over-year increase, and the company’s Cash App Card saw its monthly active users increase 13% year over year to more than 24 million.
By contrast, Block’s Square business generated a gross profit of $923 million, up 15% year over year. And if you dig into the numbers, that 15% was due more to Square’s vertical point-of-sale solutions (up 21% year over year) and banking products (up 27% year over year) than it was to its gross payment volume (up 9% year over year for card-present and 4% for card-not-present).
Block CEO Jack Dorsey attributes this anemic growth not to the product, but to Square’s go-to-market efforts, saying, “Product has always been our strength. And I would state that our product quality is far above the majority of our competitors. Where we have been weaker in the past is how we mirror that with our go-to-market strategy and just updating our approach there, especially given what our competitors have done.”
This is likely the reason for the elevation of Nick Molnar, co-founder of Afterpay, into the head sales role for all of Block’s products. His mandate seems to be to accelerate cross-product GTM and take back market share from the competitors that Dorsey was referencing in his quote.
A good example of where Molnar has already had an impact is Cash App Pay, which allows Cash App users to make online, offline, and in-app purchases using their stored balance or connected debit cards (essentially Block’s alternative to the PayPal button).
As pointed out by my fintech friend Jevgenijs Kazanins (who also wrote a wonderful primer on Cash App Pay), Cash App Pay has seen some excellent growth over the last year. Here’s Dorsey again:
As of June, Cash App Pay actives are more than 80% of the scale of Afterpay U.S. actives, compared to less than 25% a year ago. What’s driving the growth is our sales team, Afterpay’s enterprise sales team.
“Afterpay’s enterprise sales team”.
No wonder Nick got promoted.
#2: Banks are Complaining About Open Banking
What happened?
I’m shocked, shocked I say, to discover that banks are still grumpy about numerous parts of the CFPB’s plan to mandate consumer-permissioned data sharing for transactional accounts:
Banks remain concerned about the security risks and liability from unregulated fintechs and data aggregators when consumers gain control over their financial data under the Consumer Financial Protection Bureau’s data access rule.
So what?
OK, let’s run through their objections, and I’ll give my quick reactions to them.
First up, deadlines:
Banks and some data aggregators have asked the CFPB for an extended two-year timeframe to comply with the CFPB’s final rule on personal financial data rights.
Banks already have built applications that allow more than 50 million consumers to share their bank transaction data with third-party fintechs and data aggregators. All the parties in the data sharing ecosystem will have to update public-facing websites, ensure that data is provided in an as-yet unestablished standardized format and enable support for data elements — some which, like bill payment data, are not currently shared.
Alex’s Take – This is a fair request, from my perspective. The CFPB has yet to officially designate a standard-setting organization for open banking (the CFPB has been engaged in a game of chicken with the Financial Data Exchange, which is why there’s been this delay on designating an SSO … you can read more about this here and here) and without a finalized technical standard, it feels a bit unfair to expect the industry to stick to the original deadlines.
Next up, regulatory supervision for fintechs:
CFPB Director Rohit Chopra said in recent testimony before the House Financial Services Committee that data aggregators currently are subject to supervision through the CFPB’s existing authorities based on their risk determination and as larger participants in the consumer reporting market. But banks still want a larger participant rule to sweep in more nonbanks.
“Bringing at least some fintechs under CFPB supervision affords a necessary regulatory lever to ensure compliance,” said Ryan Miller, vice president of innovation policy and senior counsel at the American Bankers Association, in a comment letter. “However, it does not cover the entire ecosystem and only accentuates the supervisory gap for the vast majority of fintechs.”
Alex’s Take – Again, I think this is a fair complaint. No regulatory agency wants to be responsible for supervising fintech companies. There are too many, and they move really fast, but I do think banks have a point about the relative lack of regulatory scrutiny that is proactively applied to fintech companies compared to banks, especially when you consider our next objection …
Liability:
Bank regulators already expect banks to safeguard information and to exercise judgment and due diligence on third parties. Banks and others — including consumer advocates — have asked for the CFPB to clarify how liability would work under the final 1033 rule.
“Stakeholders are concerned about the lack of clarity in the proposal about who bears responsibility if a third party misuses the data or in some other way violates the requirements of the rule,” wrote Major L. Clark, deputy chief counsel in the Office of Advocacy of the U.S. Small Business Administration. “Such lack of clarity could lead to confusion and expensive litigation. Advocacy encourages the CFPB to clarify who bears responsibility if a third party misuses the data or violates the requirements of the rule.”
Alex’s Take – I agree, again! The banks and I are apparently vibing right now. This is a fair concern. Liability is really unclear in the draft rule and it doesn’t seem fair to me to expect banks to enable consumer-permissioned data sharing and to vet all of the third parties that consumers may authorize to pull that data. Regulators or data aggregators should be the ones to vet and certify the authorized third parties, IMHO.
OK, let’s see if the banks and I can go 4 for 4 – payments:
Banks also are clear about making certain the CFPB does not exceed its authority under 1033 to allow nonbank fintechs and aggregators to use the rule as a vehicle to initiate payments. Some of the debate has been around the categories of information consumers are allowed to share with third-parties, an issue banks are clear should not include payments.
“Section 1033 was created as a way for consumers to ‘access information,’ not mandate specific functionality,” Miller wrote. “The statute does not create an obligation to enable payment transactions initiated by third parties. Thus, this data field exceeds the powers delegated by Congress and should be struck.”
Alex’s Take – Ohh yeah, no. I’m going to have to disagree with banks on this one. Making it easier to initiate account-to-account payments (also known as pay-by-bank) is good for consumers. I know that the issuers of credit and debit cards might disagree, but you’re going to need to make a more substantive argument to me than “the CFPB exceeded the authority granted to it by Congress.”
#3: The Enduring Need for Middleware
What happened?
Unit signed a couple of new bank partners.
Lincoln Savings Bank:
The $1.8 billion Lincoln Savings has a BaaS program that dates back 10 years and currently five fintech partners, including money management apps Qapital and Acorns. The bank prefers partnering with larger, more mature companies, including some that are regulated and publicly traded, rather than startups, because they typically have a higher bar to meet, understand what it means to be regulated and have the resources to invest in their banking services. (The bank will make exceptions; Willett says Lincoln Savings is speaking with a smaller firm now because his team is familiar with the founders and their previous successful venture.) Above all, Lincoln Savings wants “a philosophical alignment on regulatory compliance,” said Willett.
To that end, Willett describes the bank as agnostic as to whether it works directly with a nonbank partner or uses one of its middleware providers, Helix by Q2 or Unit, to underpin the relationship.
Lincoln Savings signed with Unit in the first quarter of 2024; it uses Unit to connect with and onboard clients and their end users through application programming interfaces, or APIs; book accounts; and facilitate transactions consistently and at scale. Lincoln Savings uses Helix for a similar purpose.
And Vantage Bank Texas:
Vantage Bank Texas in San Antonio is a more recent Unit client. Its agreement with Unit marks the $4.2 billion-asset bank’s entry into the BaaS and embedded finance space. It will use Unit’s functionality to embed financial services such as deposit accounts and debit cards into software companies’ products.. The bank also plans to use Unit’s oversight tools.
Vantage’s program has been three years in the making. In preparation, Vantage developed an enterprise risk framework, data lake and integration layers to connect future nonbank partners with Vantage and a potential middleware provider. It also hired a chief risk officer and discussed its strategy with its regulators. The conversations with Unit began about a year ago.
So what?
This news suggests a couple of different things.
First, Unit is clearly adapting to the new world of BaaS. Here’s a quote from the American Banker article:
Unit has recently made changes to enable more direct communications between its bank and nonbank clients.
“We’ve never tried to stand between clients and banks, but given the heavy emphasis on the importance of deep interactions between banks and third-party program managers, we are trying to encourage that to the maximum extent we can,” said Alex Acree, chief legal officer of Unit. For instance, a fintech may submit a request to change ACH limits for certain customers through Unit’s centralized communications platform, rather than through an ad hoc system of phone calls, emails or Slack messages. The sponsor bank can read and respond through the platform while maintaining an auditable trail.
I don’t completely agree with the characterization that Unit never tried to stand between clients and banks, but to the extent that it did do that in the past, it was very much at the request of both the clients and the bank partners, none of whom wanted any more direct interaction than absolutely necessary. Over the last 12-18 months, regulators have dramatically redefined what’s “absolutely necessary” when it comes to banks’ direct supervision of fintech partners, and, to its credit, Unit appears to be adapting. Clearly, Lincoln Savings and Vantage think so.
Second, I think this news reinforces just how difficult it is for BaaS banks, even in this era of diminished BaaS supply, to acquire, integrate, and oversee fintech programs on their own. This, more than anything, seems to have been the motivation behind these new partnerships with Unit:
[The kind of support Unit provides] “gives you a greater suite of capabilities and the ability to work with a larger array of companies than we could work with on a direct basis,” said Willett, who previously started the Warsaw, New York-based Five Star Bank’s BaaS program before moving to Lincoln Savings in December 2023. “We don’t have that layer of capabilities. We haven’t built out a similar API economy.”
Obviously, these capabilities can be provided by other companies, such as the core banking vendors (Lincoln also partners with Q2 for BaaS). Still, this is a good sign for Unit (and potentially other BaaS middleware platforms).
