Square’s proposed US$29bn acquisition of Australian buy now pay later (BNPL) specialist Afterpay expands its loan capabilities for younger buyers. Reports suggesting the purchase price represents roughly 60x Afterpay’s current gross profit has raised eyebrows.[i] But the deal is about more than just buying an experienced player in the BNPL space and helping Square expand its business in the Asia Pacific region. Perhaps more importantly, it also presents an opportunity for the company to build a bigger eCommerce platform that gives online merchants a new route to engaging with their customers and consumers more options to fund their purchases.
Loans powerful growth tool
Square reports that instalment loans have already boosted its core seller business. Excluding bitcoin sales, the company generated total net revenue of US$2bn in the second quarter of 2021, up 87% year on year with gross profit expanding 91% in the same period and EBITDA almost tripling to US$360m.
It will now integrate Afterpay into the point of sale (POS) hardware and software solutions it provides to online merchants and the Cash App. CashApp is a peer-to-peer payments platform, which allows consumers to pay bills, purchase goods and services, and transfer money to friends and family using their smartphones.
Cash App currently generates revenue by charging sellers a 2.75% fee to use the application. For consumers, the purchase is free though they have to pay fees to access additional services such as instant bank transfers (1.5%), for example, or make personal payments using their credit cards instead of their Cash App balance (3%).
There were 70m active Cash App users and 40m monthly active users as of the second quarter of 2021, which helped drive Square’s gross payment volumes up 88% year on year to be worth US$43bn. The expansion is partly driven by the US$302m purchase of a majority 80% ownership in global music and entertainment platform TIDAL in April 2021, which currently offers a catalogue of more than 70m songs and 250k music videos.[ii]
Giving Square’s Cash App users a consumer credit product they can use at more than 18k online merchants in the US (and 96k worldwide) could go a long way to encouraging more consumers and merchants to sign up to the platform. Afterpay reputedly adds around 8.1m customers in the US and 17m globally, all of which can now become Cash App customers. That user base is also reasonably sticky – Afterpay estimates that 90% of its customers are repeat users.
On the way to a Super App
Right from the company’s formation in 2009, Square (and Twitter) chief executive officer Jack Dorsey has always aimed to create a consumer/merchant payment network geared towards small businesses.
Having started exclusively as a P2P service in 2015 to rival the likes of PayPal-owned Venmo, Apple Pay and Google Pay, Square’s Cash App has steadily expanded to offer direct deposits, cryptocurrency purchases and investment features. The integration of Afterpay’s BNPL loan function is just the latest step in broadening its repertoire into something that now starts to resemble something like “Super Apps” from WeChat and AliPay tailored for the US market.
Combining all those features could give both Afterpay and Square Cash app users an incentive to do more business within that ecosystem, considering the additional credit/debit/shopping capabilities on offer. The further growth of Cash App’s MAU base would help attract more merchants onto the platform, which attracts even more consumers and leads to a rapid scale-up of the business.
Critical mass is crucial
For Square, the Tidal acquisition too looks like another strategy to sign more small businesses in the form of musicians to the platform while extending the range and volume of goods and services it offers. Hip hop influencers helped boost subscriptions to Cash App. At the same time, Tidal launched in 2015 with backing from luminaries including Jay-Z, Beyonce, Rihanna, Kanye West, Madonna, Alicia Keys, Calvin Harris and Chris Martin.
Many artists struggle to make a living in the early stages of their careers. Square’s mix of readily available loans and consumer audiences could provide a compelling combination for a historically overlooked and underserved segment of the global economy. Quite simply, the idea is that the more consumers on the platform, the more merchants will be attracted to it. Even more so, if those consumers have a line of instant credit to rely on from the same provider, should they prove short on funds.
[i] Square to buy Australia’s Afterpay in $29 billion deal as ‘buy now, pay later’ trend takes off, CNBC, 1st August 2021
[ii] What Square’s $302 Million TIDAL Acquisition Means For Its Music Industry Ambitions, Forbes, 4th May 2021