What is Square?
With Jack Dorsey pushing the company aggressively into crypto, buying a music-streaming business, expanding its payments services into banking, and adding crypto and stock trading to a money-transfer app, trying to pin down Square's identity is challenging.
At one time, Square was symbolized by simplicity: Dorsey held up the company's tiny dongle at conferences to point out its elegant transformation of phones into credit-card terminals. Today's Square is far harder to get your hands, or your head, around.
Cash App, originally popular for peer-to-peer payments, now offers stock and bitcoin trading. Square owns a majority stake in Tidal, the music-streaming service backed by Jay-Z. And more recently, Dorsey said Square would build a crypto hardware wallet and a bitcoin-focused developer platform, whose name, he said, was "TBD."
Crypto is now an undeniably big business for Square, since bitcoin trading revenue made up nearly 70% of its revenue in the first quarter. (That number is partly a product of the huge run-up in bitcoin prices at the beginning of the year, and partly of accounting quirks from the way Square handles bitcoin transactions.) But it's less clear how the separate crypto unit will fit into Square's overall business.
This may be the realization of Dorsey's slowly unfolding plan to make Square a holding company for autonomous fintech businesses. Back in October 2018, Square's then-CFO Sarah Friar announced she was leaving to run Nextdoor. Dorsey said at the time that Square's structure is "different" from those of other companies — with CEOs or "leads" for each separate unit. The mix of businesses has changed, too: Square sold one of the units Dorsey mentioned, Caviar, in 2019.
So why keep these businesses together? In Dorsey's mind, crypto is about economic empowerment, which is Square's stated mission and the loose framework for how its business units align. And increasingly, crypto is the thing the businesses have in common.
Square is trying to integrate crypto into all its business units, said Melody Brue of Moor Insights & Strategy, citing things like Square's educational material on bitcoin built into Cash App. "They're infusing crypto into each of these business units ... in a way that introduces consumers to it in a non-threatening way."
Square can go after both hardcore crypto enthusiasts with TBD, in hopes of moving Square into a leadership position in the crypto industry, while using Cash App to court mainstream consumers who are new to crypto and are less likely to use a crypto-focused service like Coinbase.
And keeping TBD and the hardware wallet under Square's broad corporate umbrella — rather than spinning them out — makes sense because Square is a trusted brand, Brue said. "Obviously Jack is very bullish on bitcoin. The wider name-recognition Square has as opposed to other crypto hardware developers out there makes it a smart move for them to keep it under the Square brand."
But separate units make sense for regulatory reasons. Since financial companies are highly regulated, keeping crypto separate from banking, for example, will put regulators' minds at ease, said Jai Das, president at Sapphire Ventures, which was previously an investor in Square. Square went to considerable effort to secure a charter for an industrial bank subsidiary, which recently began operations.
Separate units could also help with recruiting, since crypto-focused engineers may prefer a separate unit that focuses on their interests, rather than begin subsumed in a larger payments company.
Some investors assign a discount to holding companies, since it lumps different businesses with different growth prospects together. But in Square's case, the stock has been performing well. Investors may view Square as a broader bet on innovation in the fintech sector through its various units. It's a "thematically-aligned holding company," according to Bain Capital Ventures' Matthew Harris.
Hanging together, or separately?
But even if bitcoin makes sense for Square, do Square's units actually support each other?
Seller, which offers a range of payments and business tools for merchants, has some natural tie-ins with Cash App. Customers can pay with their Cash App at Square merchants and get rewards, including a "bitcoin back" offer. Businesses that use Square Payroll can transfer up to $200 in wages early to employees via Cash App. Dorsey has talked about Tidal exploring NFTs and smart contracts for musicians. But the reality is that Seller and Cash App don't seem to have as many natural connections with Tidal or TBD.
Maybe that's not the point, since the units operate independently, according to some investors. Square's business units aren't charged with finding connections with each other. If that happens, they're nice to have. But the only real onus on them is to hit Square's mission of "economic empowerment."
Of course, there's the risk of the company getting distracted and losing its grip on its core merchant and payments business. But so far, the numbers aren't showing that: After dipping in the pandemic as lockdowns affected Square's retail customers, Seller's gross profit increased 32% year-over-year in the first quarter.
The Dorsey factor
Most companies wouldn't allow their CEO to start new units that have limited connections to its existing business. But Dorsey isn't most CEOs.
Since "economic empowerment" is a pretty broad moniker — everyone from lending startups to Robinhood to Goldman Sachs claims to be for it — that leaves a wide remit for Dorsey to operate and spin up independent business units.
"While I wouldn't recommend that most founders launch distinct businesses at once, even if within the same theme, I would say that based on his track record I'm inclined to give Jack Dorsey the benefit of the doubt with regard to his ability to do all of this at a high level," Harris said.
Dorsey's certainly thinking big. At a bitcoin conference last week, Dorsey said he hopes bitcoin can help bring about world peace.
