Square: A lesson in disruption

Unbundling describes the process of breaking up products or services within a value chain to focus on particularly valuable parts. Thanks to the strong focus, this part of the value chain can be better served. Unbundling is a great way to attract customers away from existing players. In fact, much of the innovation-driven by technology companies at the beginning of the internet age has been based on unbundling existing value chains. Amazon unbundled retail stores, Apple’s iTunes unbundled music albums, and Google unbundled newspapers. And this strategy was also the beginning of the fintech era.

Fintechs — startups that provide financial services using advanced technology — have triggered a transformational wave in the traditional financial industry. They initially emerged in the aftermath of the financial crisis of 2008.

And their thesis was simple: there are certain services that banks offer that, in the absence of competition, are relatively overpriced. However, these services do not necessarily have to be offered by a bank. They could be offered by a startup using more advanced technology at a lower cost and with a better customer experience. The first generation of fintech companies, thus, focused exclusively on a small, high-margin part of the value chain and offered a superior product and experience. Often, disruptive innovation begins with unbundling. A bank with outdated legacy technology simply can’t be good at everything. Unbundling allows focus. Unbundling allows to build up comparative advantages. Fintechs unbundled banking services.

They were not perceived as competition by the banks. After all, a bank offers 100 different services and the fintechs focused on just one of them. It is, therefore, no surprise that individual fintechs did not pose an existential threat. Nevertheless, they succeeded in attracting millions of customers within a few years.

However, there were also some challenges with unbundling. At the end of the unbundling cycle, the end customers had ten different financial apps on their phones. These apps are the best at whatever they offer, but customers were overwhelmed with so many different options. And they lost track of their financial situation. There were also challenges from a disruptor’s perspective. The fintechs had customer data, but only concentrated in one area. Data silos were the result.

As a consequence their thesis has evolved: Once they had the customers, they could start offering them other products and increase the value per customer. In essence, they added new revenue sources through an integrated platform. Here, fintechs are not much different from banks. Traditional banking is also about increasing the lifetime value of a customer. Banks try to win customers at an early age to sell them loans, mortgages, and pension solutions later on. And since bank customers are very sticky (think: how often have you changed your banking relationship), this strategy worked well.

A rebundling occurred. Unbundling and rebundling are like the ebb and flow of the ocean. It is a recurring cycle. Now that fintechs were maturing, they no longer aimed to be the best at one thing. Fintechs that focused on a small part of the value chain found each other and collaborations emerged. Others have expanded their services horizontally with the help of acquisitions. More and more services were offered to the now existing customer base. Simple credit card startups became true neobanks — digital-only banks with a diverse range of services, on par with traditional banks.

Now there is a company that goes one step further: unbundling, then rebundling across different ecosystems. Blurring the borders. Enter Square.

Square started in 2009 with a simple device that allowed anyone with a cell phone to accept credit card payments. In the meantime, the company has expanded its offerings to include an incredible range of services. For example, Square now offers an entire suite of software for SMEs, but also payments, online trading, and loans to end customers.

And that’s where Square differs from the competition. While the rebundling of other successful fintechs is limited to one category of customers, Square has managed to achieve a dominant position in two ecosystems.

On the one side, there’s the Cash App. Square’s Cash App has 36 million customers in the US. By comparison, Wells Fargo and Bank of America have 70 and 66 million customers, respectively. Both have existed for over 100 years. Square was founded a bit more than 10 years ago.

The Cash App went through its own unbundling, rebundling cycle. It was developed in a hackathon in 2013 as a simple mobile payment service. Today, the Cash App can be used as a bank account, as a P2P payment option, and to invest in stocks and cryptocurrencies. It also offers a free tax-filing service. At the same time, Square developed an enormous partner network. Cash app users benefit from changing discount deals at fast-food restaurants, delivery services, or ride-hailing companies. The network effects associated with Cash App have given Square a significant competitive advantage. This has allowed Square to continuously increase the profitability of each customer. The longer customers stay with Square, the more recurring revenue they generate for Square.

On the other side, Square also has a whole suite of software and hardware products for corporate customers, including payment terminals, accounting, appointment, and invoicing software, and much more. These types of services benefit from a strong lock-in effect. Besides, Square also has a bundle of services specifically for restaurants and one for e-commerce companies. And if that wasn’t enough, there’s also the possibility to integrate Square’s services into your own apps and products using APIs. Developers can also create additional software on Square’s own marketplace. Square is expanding its products not only horizontally, but for each ecosystem also vertically and even cross-functionally. Square could use its seller base as an acquisition channel for new Cash App users and vice-versa. Square’s partner network enables the creation of a direct bridge between Square’s corporate customers and its private customers, potentially disintermediating third parties completely.

Source: Square

And Square is also expanding into completely different industries. Earlier this month, it bought the music streaming service Tidal. The goal is to serve creatives and creators, helping them sell music, merchandise, and tickets. They will also likely integrate Cash App into Tidal. Square is thus bundling financial products with lifestyle services. So it wouldn’t be surprising if Square partnered with a video streaming service or bought a ride-hailing provider next. Square could play a role in the lives of its users not just as a bank or financial services provider, but as an indispensable Super app. It has become a prime example of how financial services can be embedded in other industries.

Access to millions of end-users and thousands of corporate customers ensures that Square must have a wealth of data. Square is arguably the financial company with the most data in the world (perhaps behind Alibaba’s Ant Financial). And Square is investing heavily in data and artificial intelligence capabilities. Over the past few years, it has acquired numerous startups in machine learning and deep learning.

Simply put, fintechs have several options after their initial success with unbundling:

  • Horizontal expansion, i.e. expanding the service offering. This is the previously discussed strategy of rebundling services.
  • Vertical focus, i.e. focussing on a specific customer segment and optimally serving this niche with highly tailored services. True Link Financial is an example that focuses only on the elderly.
  • Banking-as-a-service, i.e. withdrawing from the front line and using APIs to make one’s own services available to other companies and thus to their customers. Successful examples of this are Treasure Prime in the US and Railsbank in the UK.
  • Embedded finance, i.e. integrating financial services into non-financial services. One example is Gojek, which started as an Indonesian version of Uber and now offers various financial services.

Square has decided to go down all four tracks. If it can continue to operate successfully across all four strategies, the company may indeed become a financial and tech giant and join the ranks of the FAANG (Facebook, Amazon, Apple, Netflix, Google).

Zani Sharifi​
Head Operations​ RFS

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