Super Apps

In this post, I’ll touch upon briefly the definition of a Super App, give a few examples and talk about the business implications of these apps.

The term Super Apps is generally credited to Mike Lazaridi, the founder of Blackberry, who defined it as “a closed ecosystem of many apps that people would use every day because they offer such a seamless, integrated, contextualized and efficient experience”. In laymen’s terms, a Super App is an application that offers various services on one interface. While the mix of services offered by Super Apps varies from one to another, the common denominators of these apps are 1/ they are all two-sided networks popular with both merchants and consumers and 2/ they all began their journey by being excellent in one function before branching out to others. Merchants need to have access to a lot of consumers to join a network while consumers only find the network useful when there is a lot of utility, namely plenty of merchants. The chicken and egg problem of a two-sided network is hard. Therefore, the singular focus on a vertical in the beginning makes sense as start-ups can’t afford to solve this issue in multiple verticals. No-one can build a Super App right from the get-go. Once an app excels and makes a name for itself in a vertical, why not leveraging existing traffic and offering users more reasons to stick around longer?

Examples of Super Apps

WeChat

WeChat started out as a messenger app. An engineer named Allen Zhang alerted his employer Tencent on a threat of other competitors taking away its market share and app engagement. To stay competitive, WeChat transformed itself into an app on which users could do everyday things on a single interface including payments, social media, e-commerce, doctor appointments, hotel reservation or ride-hailing. The pivot was a hit as the new services surpassed even the apps that inspired WeChat in the first place. 

Facebook

Facebook and its founding story need little introduction. Over the years, Facebook has added several services to make itself stickier as a platform. Nowadays, users can shop on a marketplace or Facebook-native stores; create new connections with Facebook’s own Tinder version; make payments with Facebook Pay or consume exclusive content from creators. With its ambition and virtually limitless resources, it won’t be a surprise that Facebook or Meta will expand its offerings in the future.  

Grab

The title of grab.com reads “Grab: The Everyday Everything App”. Its status as one of the biggest Super Apps in Southeast Asia is so different from its humble beginning. Grab was founded as a taxi-hailing business in Malaysia in 2012 by two Harvard graduates. The company gradually expanded into other areas, such as other modes of ride-hailing, food delivery & nonfood delivery, travel bookings, bill payment and financial services. In Vietnam, almost everyone in big cities uses Grab for daily tasks from food delivery, ride-sharing or bill payments.

What Grab mobile app looks like in Vietnam
Figure 1 – What Grab mobile app looks like in Vietnam

Uber

Uber was founded in 2009 by Travis Kalanick and Garrett Camp as a ride-hailing alternative to taxies. The company’s meteoric rise saw it become a global phenomenon, but the company today is more than just a ride-hailing app. In 2014, Uber launched a food delivery service called Uber Eats, which was later rebranded under Delivery. While Covid-19 decimated the Mobility segment (ride-sharing) as riders were restricted by stay-at-home orders, the pandemic was a catalyst for the transformation of Uber as a whole. Delivery has been growing substantially due to consumers ordering food and grocery deliveries. Its gross bookings have repeatedly surpassed Mobility’s and now reaches Mobility’s pre-pandemic level. Second, the company has made strategic acquisitions to expand beyond food delivery. In June 2020, Uber acquired Cornership, a popular grocery delivery service in Latin America. A few months after, it added Postmates, which is very competitive in coastal cities and offers delivery-as-a-service for non-food items. In October 2021, Uber took over an alcohol delivery startup called Drizly. The company has been tinkering with marijuana delivery in Canada and waiting for the green light from the federal government before launching it in the U.S. Powered by the new capabilities, nonfood categories make up around 5-6% of Uber’s overall gross bookings and are expected to grow more in the future. Uber’s ambition is very simple: be the go-to app when consumers have a transportation need. 

PayPal

PayPal first made a name for itself by being a secure digital wallet and online payment system, especially as the primary checkout option on eBay. Since its spin-off from eBay in 2014, the company has added plenty of services to its mobile app and become a formidable two-sided network, due to relentless acquisitions and product development. End users can access various services on the current PayPal app, including paycheck deposit, high-interest savings, bill payment, remittance, credit cards, debit cards, in-store & online payment, BNPL, PayPal Credit, P2P payment, shopping deals and investing. PayPal’s end goal is to be the go-to Financial app for its users.

PayPal's offerings to consumers and merchants
Figure 2 – PayPal’s offerings to consumers and merchants. Source: PayPal

Cash App

Cash App started out as a P2P payment app in which users could transfer funds to anybody in the U.S. Nowadays, users can pay for purchases in stores and online with Cash App debit card and Cash App Pay; invest in stocks and cryptocurrency; or make deposits into checking accounts. In November 2020, Square bought the tax filing division of Credit Karma and subsequently added to its flagship app the ability to file taxes and receive tax refunds. In August 2021, Square paid $29 billion for Afterpay, one of the major BNPL players in Australia and in the U.S. It’s just a matter of time before Cash App turns on BNPL for its users and merchants. Cash App’s ambition is similar to PayPal’s; which makes it interesting to see how the two compete in the future.

Pros and Cons of partnering with Super Apps

Merchants stand to gain an additional payment option as well as more sales from Super Apps, but the story isn’t all rosy. Too much reliance on Super Apps means that merchants’d risk ceding the control of direct customer relationships. In business, few things are more valuable than that. Take Apple and Amazon for instance. Apple’s customer base is so loyal and attached to their brand that almost all developers or other brands take the back seat in negotiations . Amazon’s scale and iron grip on the valuable Prime base allows them to dictate terms over merchants. When you buy from a merchant on Amazon, do you feel more related to the former or the latter?

For banks, Super Apps can have adverse impact in a couple of ways. First, services such as PayPal in 4, Afterpay, PayPal Credit or PayPal/Venmo credit cards can reduce issuers’ credit card spend and subsequently balance as well as revenue. Secondly, it’s in their interest to have users maintain an in-app balance and keep funds away from banks’ checking accounts. Think about it this way: would you feel more poised to use PayPal when your PayPal balance was $20 or $0? That’s why Venmo credits dormant users $10 for downloading and logging into the app again or why Square wants users to keep tax refunds in Cash App balance. The reduction in deposits can raise banks’ cost of funds as well as threaten to cut off the most fundamental relationship with customers. 

On the other hand, Super Apps present a battleground for financial institutions vying for wallet share. Once the connection between checking accounts or debit/credit cards and these Super Apps is established, users often don’t want to go through the inconvenience of updating their default payment method. Hence, every financial institution wants to be the primary source of funds for consumers on these Super Apps to have a leg up over the competition. In this sense, Super Apps offer a business opportunity.

In summary, as you can see above, there are multiple paths towards the Super App status, whether an app’s starting point is to be in messaging, digital wallets or ride-sharing. I think all successful consumer-facing apps have ambition to gain the Super App status. If not, they’d do something wrong. It’ll be interesting to see how these Super Apps compete for mindshare as feature parity is established (meaning they all offer similar features). For merchants, working with Super Apps can be a double-edged sword. While the benefits these apps bring are very tempting, merchants need to keep in mind the risk of losing customer relationships. Like people usually say: don’t miss the forest for the trees.

Thinking about Square’s acquisition of Credit Karma’s tax unit

Back in November 2020, Square announced its agreement to buy the tax unit of Credit Karma for $50 million in cash. Unlike Turbo Tax, which is infamous for slyly inducing tax filers to pay for its services, Credit Karma doesn’t charge users fees. Here is from the press release

Consistent with Square’s purpose of economic empowerment, Cash App plans to offer the free tax filing service to millions of Americans. The acquisition provides an opportunity to further digitize and simplify the tax filing process in the United States, expanding access to the one in three households which are unbanked or underbanked. The tax product will expand Cash App’s diverse ecosystem of financial tools — which currently includes peer-to-peer payments, Cash Card, direct deposit, as well as fractional investing in traditional stocks and bitcoin — giving customers another way to manage their finances from their pocket.

“We created Cash App to provide more access to the masses of people left out of the financial system and are constantly looking for ways to redefine our customers’ relationship with money by making it more relatable, instantly available, and universally accessible,” said Brian Grassadonia, Cash App Lead. “That’s why we’re thrilled to bring this easy-to-use tax product to customers as we continue to build out the suite of tools Cash App offers. With this acquisition, we believe Cash App will be able to ease customers’ burden of preparing taxes every year

Source: Square

There are several reasons why I think Square made a big splash on Credit Karma’s tax business.

Customer acquisition

In the same press release, Square claimed that 80 million people in America file taxes online every year, yet Credit Karma’s customer base is only 2 million. As of Q4 2020, Square’s Cash App monthly active user count stood at 36 million. Even if all Credit Karma’s current users are on Cash App and all active Cash App users file taxes online, by offering a decent free tax-filing service, Square can appeal to 44 more million tax payers in America at the top of the sales funnel. In the latest earnings call, Square disclosed that its Cash App user acquisition cost is less than $5 per user. At that rate, Square only needs from the acquisition of Credit Karma’s tax tool 10 million new users to break even on the $50 million in cash paid, let alone other benefits discussed later in this entry. Obviously, the conversion rate from being a tax filer to a Cash App user won’t be 100%, but a relationship to some extent with customers is still much better than no relationship at all. As of now, Paypal is Square’s arguably biggest rival with very similar offerings. However, Paypal doesn’t have an offering equal to what Credit Karma can offer to Square, yet. Perhaps, it can be a useful differentiator.

Customer retention

Engaged customers are often the more profitable customers. Filing taxes is, in most cases, a once-a-year activity for individuals. Given that Credit Karma is a free service and that Square essentially declares its intention to keep the service free, it won’t be a revenue center. Nonetheless, it doesn’t mean the new acquisition can’t help Square grow the top line. Here is how Square currently makes money with Cash App:

  • Whenever customers use Cash Card with Cash App to pay businesses for purchases, Square makes a small interchange fee
  • If customers want to expedite deposits to their bank accounts, there is a fee. If they can wait 2-3 business days, the deposits will be free
  • Customers are charged a fee when they make a P2P transaction using a credit card
  • Square imposes a small mark-up on Bitcoin’s price before selling it to customers through Cash App

In essence, it benefits Square when customers have balance in their Cash App. The more balance there is, the more useful Cash App is to customers and the more revenue & profit Square can potentially earn. I imagine that once Credit Karma’s tax tool is integrated into Cash App, there will be a function that directs tax returns to customers’ Cash App. When the tax returns are deposited into Cash App, customers can either spend them; which either increases the ecosystem’s value (P2P), or deposit the fund back to their bank accounts. But if customers already direct the tax returns to Cash App in the first place, it’s unlikely the money will be redirected again back to a checking account. As Cash App users become more engaged and active, Square will look more attractive to prospect sellers whose business yield Square a much much higher gross margin than the company’s famous Cash App.

Additionally, there is nothing that stops Square from giving customers immediate access to tax returns in exchange for a small fee. Tax returns, after being approved, only hit bank accounts after a few days. Square can entice customers to pay a small fee to access the money immediately in Cash App which they can use to invest or make payments. It’s a win-win for everybody.

Figure 1 – The more engaged customers are, the more valuable they are to Square. Source: Square
Figure 2 – Seller offers a much higher gross margin to Square than Cash App. Source: Square

A great source of data

With Credit Karma’s tax tool, Square can have access to a reliable source of demographic data such as age, location, status, income, education, reasons for tax credits and investing behavior. Individual tax filers don’t often try to deceive Uncle Sam in their tax forms. Hence, any information derived from tax filings through Credit Karma is accurate and can be very useful to Square in designing and offering new products. Last year, Square got approval from FDIC to open a bank in Utah and a few days ago, it announced that its industrial bank named Square Financial Services already began its operations. According to the press release, the bank will first focus on underwriting and original loans to existing Square Capital customers and potentially all sellers in the future.

Nonetheless, it won’t surprise me at all if Square’s bank ventures into consumer banking products such as mortgage, credit cards, savings or checking accounts in the future. If they do, information derived from tax forms will be very valuable. I am working for a bank now. We are often frustrated by the lack of demographic information on customers. When they apply for a credit card, sometimes they disclose their annual income, along with other basic information like age or street address, but that’s about it. After they enter our system, it’s almost impossible to receive updated information in their income, their status or other information that a tax form can reveal such as security trading, cryptocurrency trading or donations. What could possibly give a financial institution that kind of information accurately, reliably and regularly on an annual basis than a tax form?

In summary, I do think this is a good strategic acquisition by Square. Personally, I can see some useful applications that Credit Karma can offer and really look forward to how it actually pans out in the near future.

Disclosure: I have a position on Paypal

Weekly readings – 3rd October 2020

What I wrote

Macroeconomic consequences of the election and my review of Long Way Up as well as the book Rage by Bob Woodward

Business

The CEO of Snowflake penned an article on culture designed to win. I am not 100% a fan of this seemingly cut-throat ideology, but it seems to work out well for him

Google is enforcing its own payment on Play Store

Axios seems to be doing quite well with 1.4 million newsletter subscribers, up from 700,000 a year ago. I always like their reporting, especially Jonathan Swan.

How mask sellers sold their goods on Etsy

This business lesson series from Protocol is pretty cool. Check it out

ARK’s bull thesis on Square and Cash App

Meat sales increased during the pandemic, with 50% of the surveyed consumers reporting buying and cooking more meat

Source: Piplsay

Technology

What Apple did behind its Scribble feature

The Verge’s interesting story on Amazon One, Amazon’s latest consumer-centric technology

What I found interesting

Once a beacon of hope garnering admiration from around the world, the US has lost a lot of respect from people around the world in the past 4 years, highlighted by its failure to deal with the pandemic

Cement is responsible for 8% of the world’s CO2 emissions

An unprecedented look into Trump’s tax returns by The New York Times. You can say a lot of things about NYT, but this piece alone should earn them a lot of subscriptions. Excellent work by the journalists involved.

Germany has its own Fauci, but the country actually listens to him

Weekly readings – 22nd August 2020

What I wrote last week

I compared what is happening in Vietnam and New Zealand in the fight against Covid-19 and why it looks very bleak for America

I wrote a bit of analysis on Square, the owner of Cash App

Business

Instacart dominated the grocery delivery in the US

Second Measure on pandemic grocery spending
Source: Second Measure

A startup that promises to deliver groceries in less than 13 minutes in Turkey

An interview with the CEO of New York Times. He grew the subscriber base from the rock bottom of 22,000 in Q2 2013 to 6.5 million today

How Uber Turned a Promising Bikeshare Company Into Literal Garbage

Technology

Ben Evans on App Store and antitrust issues

A deep dive into iPhone 5C plastic cases

John Gruber on TikTok as a security threat

What I find interesting

The Canva Backlink Empire: How SEO, Outreach & Content Led To A $6B Valuation

To all Americans who are told all the nasty and misleading facts about Socialism & Communism whenever social benefits and safety nets are mentioned, please read this from your fellow American, who considers his move to Vietnam the best decision

Confessions of a Xinjiang Camp Teacher

A dazzling civilization flourished in Sudan nearly 5,000 years ago. Why was it forgotten?