Square Online’s on-demand delivery

On Wednesday 1/12/2021, Square announced a new partnership that will enable Square Online orders in Canada to be delivered by DoorDash Drive. The new service in Canada is an extension of what Square launched in the U.S before. This is how it works: after a Square Online merchant receives an order, a DoorDash/Uber Eats courier (depending on whether you live in the U.S or Canada) will come to the merchant’s location, pick up the order and bring it to the customer. The customer can track the order through a link sent in a text message by Square. All orders with on-demand delivery will be commission-free. For every order, merchants will only pay a dispatch fee of $1.5 and a processing fee of $3.6 to Square.

Square on-demand delivery
Square on-demand delivery. Source: Square

At a closer look, the service is interesting to me. The sales pitch merchants will hear is very simple: work with us, become our merchant and you won’t have to waste valuable dollars on delivery staff or those expensive marketplaces with high commissions. A saving of $11 on every $50 order is highly attractive, but it’s not the whole story for merchants. Even though Square Online is free, anyone serious about operating a business will certainly need to upgrade to a higher tier. Who wants to build a brand with a “square.site” in their domain? Even a nobody like myself tries to secure a custom domain. To use a custom URL, merchants need at least a Professional plan at $12/month. Additionally, merchants can only enable PayPal checkout, product reviews or gift options with a Performance plan, which costs $26/month. Want advanced eCommerce stats regarding product performance or sales trend? Pay $72/month for the highest tier then. For Square, this means high-margin & recurring subscription revenue. For merchants, they need to think about what they may get themselves into.

Merchants must also be aware that using this on-demand delivery service with Square is different from being on Uber or DoorDash app. These marketplace apps are household names and likely bring more sales. That’s their primary value proposition. That’s how they can charge a commission of 30% per order. Since orders must be from merchants’ online stores, the task of generating sales and marketing now falls onto merchants who will have to choose between a bigger piece of a smaller pie and a smaller piece of a bigger pie. One thing that I have to say, though, is that by having customers place orders directly online, sellers can establish a precious relationship with customers, instead of ceding it to the likes of Uber or DoorDash.

Square Online pricing tiers
Square Online pricing tiers. Source: Square

What also interest me is the low dispatch fee. For every DoorDash Drive order, merchants normally pay a flat fee of $8. In this case, the dispatch fee is only $1.5. As the market leader in food delivery, DoorDash certainly has the bargaining power that they would not bend over backwards to work with Square at all costs. A drop of 81% in dispatch fees is massive, affecting DoorDash’s top and bottom line. Hence, I believe Square must compensate their partner in this agreement and make up for some of that loss. The question is: do the numbers add up for Square? It’s worth pointing out that a DoorDash Drive flat fee of $8 includes DoorDash’s standard processing fee of 2.9% + $0.3 per order. In other words, a normal $50 DoorDash Drive order will result in a processing fee of $1.75 and a dispatch fee of $6.25. A cut of $1.5 per order from Square on-demand delivery means DoorDash will lose about $4.75 per order in revenue. Let’s assume Square compensates DoorDash $3 on every order with on-demand delivery. 1,000 such orders per month (around 3 per day) for 1,000 merchants would put a dent of $3 million on Square’s financials. Square claimed to have millions of sellers. A wide adoption of this on-demand delivery service wouldn’t be financially tenable. How does Square make this work?

My hunch is that Square’s target audience for this service is small, to begin with. Any merchant wishing to use this on-demand delivery service must have a Square Online store. We can exclude medium and large-sized merchants from this population as they must already handle their online activity. Those that are in need for Square Online should be mom-and-pop or local restaurants that do not have a website or really need an upgrade and a delivery service. This market segment should be small enough for Square to offer this service and make the numbers work. I suspect that the company wants to use this offering as an opening to get these merchants to install Square POS in stores. Once Square successfully has its POS installed, the more orders merchants have, the more revenue Square generates. What intrigues me is what Square would do if merchants had too many on-demand delivery orders? Would Square terminate the service or start charging more?

This service from Square offers great benefits to small merchants and really differentiates the company from its rivals like PayPal. I don’t have access to their financials and breakdown on this specific service, but my guess is that because the target audience is very small to begin with, it won’t move the needle much. Is this a threat to Olo? I don’t think it is. Olo’s bread and butter at the moment is franchises with multiple locations. Their business doesn’t hinge on who powers merchant’s websites. What matters is that Olo offers a centralized system helping merchants deal with the likes of Uber, GrubHub and DoorDash efficiently. Square’s on-demand delivery requires that merchants have to build online presence with Square. It’s a different game.

Weekly reading – 18th September 2021

What I wrote last week

The importance of reading footnotes

Interesting articles on Business

Facebook Says Its Rules Apply to All. Company Documents Reveal a Secret Elite That’s Exempt. The sentence “we’re not going what we say publicly we are” can be applied to any company to some extent. The problem for Facebook is that the trust-eroding incidents happen way too often for a company with grandiose ambitions. Facebook wants us to trust them and use some of the new services for Facebook Pay, but how can trust be formed when stuff like this happens? I am sure this won’t be the last time that Facebook got a PR black eye.

Intuit Agrees to Buy Mailchimp for About $12 Billion. “Mailchimp, established in 2001, is based in Atlanta and is still owned by founders Ben Chestnut and Dan Kurzius, according to its website. The company, which hasn’t taken any outside funding, began as a web-design agency and ran an email-marketing service on the side that later became its focus. Today it also offers other digital-ad services and customer-relationship- management tools. Already popular among small businesses, Mailchimp became something of a household name in 2014, when it advertised on the first season of the hit podcast “Serial.” The company now serves 2.4 million monthly active users, including 800,000 paying customers. Half of its customers are outside the U.S. It had about $800 million in annual revenue last year, a 20% rise from the year earlier.”

Square Offers Sellers and Consumers a New Checkout Experience with Cash App Pay. It’s a natural progression in my opinion. Square is competing with PayPal to be the Super App for consumer financial needs as well as the go-to partner for commerce. PayPal has enabled payments by QR Code and mobile wallet for a while. Now, Square and Cash App have it too.

Facebook Knows Instagram Is Toxic for Teen Girls, Company Documents Show. “For the past three years, Facebook has been conducting studies into how its photo-sharing app affects its millions of young users. Repeatedly, the company’s researchers found that Instagram is harmful for a sizable percentage of them, most notably teenage girls. Expanding its base of young users is vital to the company’s more than $100 billion in annual revenue, and it doesn’t want to jeopardize their engagement with the platform. The features that Instagram identifies as most harmful to teens appear to be at the platform’s core. The research has been reviewed by top Facebook executives, and was cited in a 2020 presentation given to Mr. Zuckerberg, according to the documents.” Guess what Facebook chose to do? Nothing. Absolutely nothing.

Adobe jumps into e-commerce payments business in challenge to Shopify. The race to be the force that powers eCommerce features some of the biggest firms in the world: Amazon, Walmart, Shopify, PayPal, Adobe and Square. If you notice, the first three have fulfillment capabilities. PayPal bought Happy Returns. So it’s only a matter of time the latter three build out their own fulfillment muscle.

Amazon Is Doing It. So Is Walmart. Why Retail Loves ‘Buy Now, Pay Later.’ “Shoppers spend more at Macy’s when they use installment plans offered through Klarna Bank AB, Macy’s CEO Jeff Gennette said on a recent earnings call. Klarna also is helping the retailer attract younger customers, he said. A desire to boost loan approvals was among the reasons Walmart in 2018 decided to end its decadeslong credit-card partnership with Synchrony Financial. Citigroup Inc. saw a sevenfold increase in the dollar amount of credit-card purchases converted to installment loans in July, compared with the same month a year prior, said Gonzalo Luchetti, head of Citigroup’s U.S. consumer bank.”

Other stuff I find interesting

One Woman’s Mission to Rewrite Nazi History on Wikipedia. I hope down the line, years from now, there will be folks who come across what Ksenia Coffman did and be thankful that she did. Same way as I do today.

What Makes Work Meaningful — Or Meaningless

Stats

“Close to half of all new U.S. gun buyers since the beginning of 2019 have been women”

55% of shoppers start their 2021 holiday season shopping before Thanksgiving

Source: JungleScout

Weekly reading – 14th August 2021

What I wrote last week

I wrote about Square’s acquisition of Afterpay

Business

In the Streaming Wars, Sony Stands on the Sidelines. I think for the short term, it makes sense for Sony to adopt a zig-when-everyone-else-zags strategy as building a streaming service is not Sony’s strength. Of course, no strategy is risk-free. If the big streamers can create content on their own and don’t need Sony any more, the iconic Japanese firm will be in deep trouble. It is a big bet from Sony, but as the market stands today, I don’t think the company has too many options left.

Rappi’s poor service opens the door for competition, but users aren’t leaving yet. Two things from this article struck me: 1/ even though they were horrible incidents with services and customer support, there hasn’t been a customer exodus from Rappi yet. 2/ RappiPay is the most profitable and fastest growing part of the company. If the challenging delivery gig doesn’t work out for the company, it can pivot to be a full blown fintech.

Amazon’s $1.5 billion air cargo hub starts operations. In the arms race to compete with other retailers or eCommerce platforms like Shopify, solidifying or even adding to their advantage in infrastructure and last-mile delivery is the right move for Amazon. Just look at the price tag of the cargo hub. If anyone wants to compete with Amazon on this front, that’s at least what they should expect to spend. And it’s a tall order for many companies. With that being said, having another cargo hub doesn’t guarantee success, so it will be interesting to follow this market in the near future.

Excerpt: How Google bought Android—according to folks in the room. The founders of Google, especially Larry, do seem to have excellent foresight in acquiring Android. I look forward to this book.

What I found interesting

John Gruber’s excellent post on Apple’s new “Child Safety” measures. The nuances and details laid out by John are very enlightening and important in understanding what Apple is doing here.

Reality has a surprising amount of detail. The devil is in the details

Archaeologists discover 4,000-year-old ancient city in Iraqi desert. Imagine you see now something that existed 4,000 years ago. That must be a surreal feeling.

Believing In Yourself is Overrated. This is Better. I am not really a fan of the “fake it till you make it” mentality. So I am very glad that Ryan Holiday wrote about it since he is far more eloquent than I can ever be. In short, the more effort you put in something, the more confident you are in yourself

Stats that may interest you

Momo has 60% of Vietnam’s mobile payments market

Amazon has 11% of the U.S ads market

Amazon spent $6.2 billion on video and music content in the first 6 months of 2021. To put it in perspective, Netflix spent a tad lower than $8 billion on content in the same period

Why Square paid the big bucks for Afterpay

Last Sunday, Square announced that it was going to acquire Afterpay, the Buy Now Pay Later provider from Australia, in a $29 billion all-stock deal. A lot has been said about this merger and the one bear case that I have seen quite often is that people questioned whether Square could actually build its own BNPL in-house and is wasting $29 billion on this deal. Below is how I think about it.

Before we go further, let’s take a minute to talk about these two companies in general. Afterpay was founded in Australia in 2014 by Nick Mornar and Anthony Eisen. The company allows shoppers to break purchases into four interest-free installments paid every two weeks. Afterpay charges merchants 3-4 times interchange rate in exchange for customer leads and the underwriting of the loans. Merchant revenue constitutes the majority of Afterpay revenue while late fees make up around 9% of the top line. Currently available in Australia, New Zealand, the U.S, the UK and Canada, Afterpay is launching services in a few European countries such as France, Italy and Spain.

Originally started as a payment company with a little credit card reader, Square has grown leaps and bounds over the years to become a publicly traded financial company with over 30 different services, a banking license and over $126 billion in market cap as of this writing. Square’s revenue comes from different sources. Bitcoin makes up more than 50% of Square’s revenue, even though the gross margin is only around 2%. The company sells POS hardware at a cost to merchants and charges them for used services. If merchants and customers want to receive funds instantly, they must pay Square a small fee. Square also offers merchants loans from which it earns interests. Last but not least, there is interchange revenue from millions of transactions processed through Cash App.

Square used to have a BNPL option which was discontinued due to the effects of Covid-19. Then why the sudden change of heart and why wouldn’t Square reactivate Square Installments instead of paying an enormous sum for Afterpay? First of all, it’s about international expansion. While Square is available in some overseas markets, 85% of its GMV is from the domestic front. Meanwhile, more than 50% of Afterpay’s GMV originates from non-US markets. Acquiring Afterpay gives Square quick access to those international markets and reduces reliance on its home market. Plus, it’s not really easy to build up a BNPL service from scratch. In addition to having to acquire merchants and users, to be a BNPL provider, one has to deal with a lot of regulation hurdles. These are the things that currently Afterpay does better than Square in non-US markets. Hence, this purchase will help Square bypass all the trouble and acquire these skills quickly.

Second, customer acquisition. Afterpay’s main clientele includes Enterprise merchants wanting to leverage its popularity with consumers. On the other hand, while Square’s fastest growing segment is merchants whose GMV is higher than $500,000 a year, I doubt they are big enough that we can call them Enterprise. Hence, this acquisition enables the acquirer to move up the ladder and into a new market. The U.S is responsible for 62% and 43% of Afterpay’s active customers and GMV respectively. However, I’d say that in terms of reach to U.S consumers, Square is the far better company in this equation and has multiple touchpoints that it can use to acquire new users (Credit Karma tax, Cash App P2P, Bitcoin trading). Therefore, Square can definitely assist Afterpay in user acquisition. On the other hand, Afterpay gives Square access to the former’s high income customer base in coastal cities where Square isn’t as competitive as in the South.

Third, merchant acquisition and retention. Merchants pay BNPL providers because of not only consumer preferences, but also the new business that these providers bring due to their marketing reach. For instance, Klarna reported 22 million customer lead referrals in the U.S December 2020 alone. This extra revenue is what merchants, especially smaller ones, crave and are willing to pay for. With the Discovery tool from Afterpay, Square can strengthen the relationship with merchants and keep them in the ecosystem. The more merchants they have, the more their Cash App can appeal to consumers and the healthier the whole ecosystem will be. As a result, the addition of the Discovery tool is strategically beneficial to Square.

Last but not least, this merger is about the competition. Square ‘s main challenger in the race to become the Super Financial App is PayPal. Formerly a P2P platform and a primary checkout option on eBay, PayPal has transformed itself into a financial service and a formidable eCommerce player. It provides both merchants and consumers with multiple different services to facilitate in-store and online transactions. With PayPal, shoppers can pay in stores and online with QR Code, tap-to-pay, mobile wallet, debit cards, credit cards and PayPal Credit. In the past few months, the company has ramped up significantly efforts in cryptocurrency trading, one of the selling points of Cash App. Additionally, PayPal recently launched Zettle, its card reader, in the US, a direct threat to Square’s bread and butter. PayPal’s own BNPL, PayPal in 4, has facilitated $3.5 billion in GMV in a few markets since its launch in August 2020, $1.5 of which came in the last 90 days alone. As mentioned above, Square no longer has an installment service.

Outside of the U.S, PayPal and Klarna, the global leader in BNPL, share a lot of market overlap with Square and Afterpay. This acquisition of Afterpay gives Square an instant counterweight to these competitors. Could Square build its own BNPL muscles? Absolutely, I have no doubt about it. But it will take a lot of time and resources for Square to play catch-up. By the time the company could form a respectable presence in the markets, PayPal and Klarna would already sign more merchants, gain more market share and establish a purchase habit as well as brand name with consumers. It would be incredibly tough to overcome these advantages. With Afterpay, Square won’t have to start from scratch and can compete right away with their rivals.

In summary, from my perspective, there are legitimate reasons why Square made such a big splash. Afterpay brings to the table what Square needs for its growth plan and more importantly, it does so instantly. Of course, M&A deals fail all the time. Synergies are often overstated. Cultural clashes tend to be overlooked. Execution doesn’t materialize as expected. Management teams butt heads. All kinds of trouble can happen to derail a partnership. This one isn’t immune to such risks. But I hope that one day we can look back at this deal as an important milestone and lever that propels Square to incredible heights.

Figure 1 – An example of regulatory hurdles that a BNPL provider has to deal with. Source: Afterpay
Figure 2 – Afterpay can help Square move up market. Source: Square + Afterpay
Figure 3 – Afterpay can expand to coastal cities in the U.S and acquire higher income clientele. Source: Square + Afterpay
Figure 3 – Integration of Afterpay into Cash App. Source: Square + Afterpay
Fincog Overview of BNPL Providers, Ranked by Size
Figure 5 – GMV of Global BNPL Providers. Source: Fintechnews
Figure 6 – Klarna’s footprint. Source: Klarna

Weekly reading – 17th April 2021

What I wrote last week

Hydrogen fuel cells vs Batteries

Uber may deliver marijuana in the future. Update on Credit Karma and Square

Business

Business Insider has a story on Larry Page, especially when he was determined to fire all Project Managers. Even a genius like him made a mistake, it seems. Don’t be too hard on yourself.

Why Delaware is the sexiest place in America to incorporate a company

Vimeo CEO talks about how the company reinvented itself from a video platform, another Youtube competitor to a B2B SaaS company. To be honest, as a consumer, I didn’t know that Vimeo transformed itself into a B2B SaaS player.

TikTok says that it has 100 million monthly active users in the US and is planning to bring new eCommerce-focused ads products

How the pandemic helped Walmart battle Amazon Marketplace for sellers. It’s exciting to see these two behemoths go at it in the near future. While Walmart has the luxury of stores scattered across the country, Amazon is a bigger and more experienced marketplace player.

Why It’s Misleading to Say ‘Apple Music Pays Twice as Much Per Stream as Spotify’. The best article on this particular subject that I have seen this week.

Amazon Plans Furniture Assembly Service to Catch Wayfair. I look forward to reading more about this initiative. While it sounds great as first, the reality may offer some questions that Amazon has to answer. For instance, Amazon is known for pushing its drivers to complete deliveries as quickly as possible. Asking drivers to take time to assemble products goes against that mantra. Hence, how much would Amazon be willing to slow down deliveries? How much would the premium fee offset the cost of such slowed deliveries?

What I found interesting

French lawmakers approve a ban on short domestic flights. If there is a great network of trains; which I believe there is in France, this is a totally sensible decision.

Cloudflare Pages is now Generally Available

How to Create an Interactive AR Business Card Without Code

The vanishing billionaire: how Jack Ma fell foul of Xi Jinping. Jack Ma is one of the richest people on Earth and among the most influential business people. Yet, he has fallen from grace after what he said angered Xi Jinping. Another billionaire tried to lower his net worth to avoid trouble with the Chinese government. I am from that part of the world. I can tell you that no matter how rich a person or how big a Western corporation is, you don’t take your disagreement with the ruling party public. That’s one mistake you usually don’t come back from

Stats that you may find interesting

According to a new survey by National Restaurant Association, only 18% of delivery customers preferred to order from a 3rd-party app

Amazon Prime has 200 million members. 28% of purchases on Amazon were made in 3 minutes or less while 50% were made in 15 minutes or less.

Almost 20% of retailers’ sales in 2020 came from private labels

Uber may deliver marijuana in the future. Update on Credit Karma and Square

Uber’s business reportedly hit a stride in March. CEO hinted at the prospect of delivering marijuana

In a filing today, Uber revealed that it had an astonishing month in March 2021, when its Gross Bookings hit the highest level in the company’s history. Uber said that its annualized bookings for Mobility and Delivery hit $30 and $52 billion, respectively, last month. I have mixed feelings about this. At the first glance, the filing seems like a trove of good news for Uber as the figures imply that its two main business segments are firing on all cylinders. Uber’s total bookings in 2018 and 2019 were $50 and $65 billion, respectively. If the annualized numbers above are realized in 10 months’ time, that will be an impressive achievement for a company of this size, given that our societies spent more than one year in a historic pandemic.

But IF is the important word here. To be honest, I don’t really know how the annualization is calculated. Did they multiply the bookings in March by 12? Or did they multiply the bookings in the best week in March by 52? I may be ignorant not to understand the nuances in these languages, but if you invest your hard-earned cash into a company, it’s healthy to be a bit paranoid.

Another news that came from Uber is that its CEO hinted at the prospect of delivering marijuana.

“When federal laws come into play, we’re absolutely going to take a look at it,” 

Source: The Verge

Two months ago, I wrote about Uber’s acquisition of Drizly, the market leader in liquor delivery in the US. Chief among the benefits of acquiring Drizly for Uber are the proprietary technology that can verify IDs and the team that knows how to navigate the complex legal systems at the state and county levels. These capabilities will be tremendously helpful to Uber if they decide to delivery marijuana. Even in the states that allow the cannabis delivery, consumers still have to show that they are old enough; which is the perfect use case scenario for what Uber gets from Drizly. Right now, marijuana for recreational purposes is only legalized in a handful of states and is still illegal at the federal level. Some Democrats are pushing to change that and I think that it’s just a matter of time before the change takes place. Even if marijuana for fun is legal on the federal level, there will still be a lot of work to be done on the local level as each state will have a different mandate. In that case, having a team that knows how to deal with regulations from county to county on liquor delivery like Drizly will come in handy. The recreational legal cannabis market in the US is estimated to reach $27 billion by 2024. Estimates like this are usually optimistic, but even if half of that estimate checks out, it will increase Uber’s Total Addressable Market significantly.

Update on Credit Karma and Square

Last month, I wrote about Square’s acquisition of Credit Karma’s tax unit and potential benefits that the former can take from the latter

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. 

Today, a user on Twitter noticed the new integration between Credit Karma and Square that would enable users to direct tax refunds straight to their Cash App account. Even though this is a logical move, how it will actually benefit Cash App remains to be seen as there hasn’t been any reporting on the overlap between Cash App and Credit Karma’s tax unit in terms of active users. Nonetheless, I look forward to seeing what Square brings to the market that stems from this acquisition.

Weekly reading – 20th march 2021

What I wrote last week

The economics of a credit card

Business

Hy-vee CEO shared how Covid shaped the company’s operations moving forward

Why Amazon Fresh stores will likely rock a few boats. As its competitors do more shipping from their own stores, Amazon can get on level terms in that sense with having more stores of their own in strategic locations. Plus, if they can get these cashierless stores to run properly, they will be able to cut back a significant line item on the Income Statement, paid employees!

How Trader Joe’s $2 wine became a best-seller

Telegram App Is Booming but Needs Advertisers—and $700 Million Soon 

The new Google Pay repeats all the same mistakes of Google Allo

Apple brand loyalty hits all-time high as Samsung loyalty dives

Austin Rief: How Morning Brew went from college newsletter to $75 million in 5 years

She Came to the US to Study With Only $300 in Her Pocket — Now She’s a NASA Director For the Mars Rover

What I found interesting

Does Atlantic Canada have a blueprint for rural revival in the post-pandemic era?

Facebook’s GDPR bypass reaches Austrian Supreme Court

Stats you may find interesting

BNPL grew by 215% year over year in Jan and Feb 2021. Total eCommerce spending reached $121 billion so far

As of February 2021, 45% of Square sellers accept online payments, up from 30% a year ago

56% of the people surveyed by AirBnb preferred domestic travel post-pandemic

Weekly reading – 13th March 2021

What I wrote last week

My thoughts on Square’s acquisition of Credit Karma’s tax unit

My review of the book Think Again: The Power Of Knowing What You Don’t Know

Business

An interview with Elliot Turner on Twitter. Lots of good stuff in here.

Octahedron Capital publishes a super interesting presentation every quarter, compiling quotes from executives

A very interesting piece on how Jeff Bezos approached design. I love the anecdote on how Amazon’s logo came into beings.

How Salesforce became Silicon Valley’s best late-stage tech investor. Salesforce is a prime example that you should care more about Operating Income than Net Income if you want to evaluate a company’s operations

A great post on the importance of reinvesting in a business. As the saying goes, it’s one thing to get to the top of the mountain, it’s another to stay there.

A great conversation between The Verge and Twitter’s Head of Consumer Product. The company announced some very interesting product developments in the pipeline. As a fan of the platform, I can’t wait to see what unfolds next

Postmates added $70 million in revenue and saved $3 million in network fees with Stripe

Neil Cybart published a new article on the importance of Apple’s retail stores

A very telling piece on how Facebook’s internal effort to curb misinformation using AI was punted by Zuckerberg’s desire for growth

What I found interesting

Apple Gave Us an Exclusive Look Inside Its Next-Generation Fitness+ Studio

Tesla told California DMV that its future autonomous vehicles wouldn’t be fully autonomous. What else is new?

WSJ’s profile on Manchester United star forward, Marcus Rashford. If you are not familiar with football (yeah, the real football where the ball touches feet more than hands), Manchester United is one of the richest and biggest clubs in the world. It has a reputation of playing home-grown talent and actually has been fielding at least one academy player every game for the last few decades. Marcus Rashford is the latest biggest home-grown star that came out of the famed academy. Inspired by his difficult childhood, Rashford took on the British government last year, in a campaign aimed at providing school meals to children during Covid-19. The government listened and hundreds of kids were fed because Marcus Rashford had the will to do what his reputation enabled him to.

Corporate logos are changing with the time

A look into the cyber-surveillance world of Israel

Stats that you may find interesting

Costco edged by Amazon and Apple to lead all brands in customer satisfaction

India leads the world in IPv6 adoption rate at 63%

Disney+ has more than 100 million subscribers. Though the count is impressive, comparing it with Netflix’s subscriber base, either now or when it first started, may require a lot of unpacking. The consumer attitude towards streaming is different now than it was when Netflix began to stream its content online. The mix of subscriber base is also different. Disney+ has 30% of its subscribers. Nothing inherent bad about it, but to have an apple-to-apple comparison, one must figure out whether Netflix has the same composition. Plus, the streaming competition 10 years ago for Netflix might be much less fierce than the current landscape.

If you need more evidence as to how different a GOP government and a Democratic government are, here it is. One proposed a law that benefits low-income folks (Democrats) while the other passed a law that put more money in the pocket of the richest.

Source: TPC

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 – 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?