Jack Dorsey’s neighborhood pushes into banking as stock prices drop

Cai Haun has been a loyal cash app user for nearly a decade. First, use Block Inc.’s app as a barista tip for Squirrels, now working as a barista from barista, and now send money to friends for drinks and group dinners.

Despite her loyalty, the 35-year-old content creator remains unaffected by the company’s efforts to turn clients like her into users of their banking services.

“I’m hesitant to use it for banking,” said Houn of Los Angeles. “I think it’s a leftover from my parents’ days, but I want to go to the bank. I want to be able to walk into the bank and talk to someone.”

Haun’s silence rate highlights the challenges of cash apps as it shifts its focus to consumers who convert its 57 million active users into revenue-generating banking services. The move comes as the app was once seen as a financial technology standard adopted by fintech, which would stagnate growth and convert the number of these users into profitable customers.

Block stock has fallen 32% year to date, with the company’s stock down 80% since its peak since 2021, according to the company’s stock. By comparison, the ARK Fintech Innovation ETF fell by 6.5% at the end of the year. The downturn has helped CEO Jack Dorsey’s wealth drop from $16 billion in 2021 to $4.4 billion now, according to data from Bloomberg Billionaire Index.

“The biggest question investors ask is whether they want to convert some of the 57 million people into active banking customers,” said Darrin Peller, senior analyst at Wolf Research. “Will they go from someone who pays their friends with just cash apps to get bar labels to people who actually use it for day-to-day banking?”

Cash applications are part of an increasingly crowded market. Many of its fintech competitors are also competing for customers in the rise to preferred destinations for prestigious customers, which is by offering free-to-charge accounts and payment services that attract younger, even lower-income consumers. Chime Financial Inc. recently introduced a 3.75% interest rate for users who deposit their salaries directly into their accounts, and retail broker Robinhood Markets Inc. announced plans to launch a checking and savings account later this year.

The industry is expected to become more competitive as new entrants and regulatory environments for new entrants, including Elon Musk’s X program in Space, relaxed under President Donald Trump.

Emphasizing its ambitions, Block started a marketing campaign in 15 major U.S. cities earlier this year to raise awareness of banking products. These include a high-yield savings account, a debit card, a short-term loan product called borrowing and purchasing, which pays for later services under the Afterpay brand. The company has historically focused on serving the book segment, or consumers who usually have bank accounts but have to rely on alternative financial services.

The Cash App teamed up with Sutton Bank to issue its debit cards and received approval from the U.S. Federal Deposit Insurance Company in March to issue short-term consumer loans through Block Suppirity Square Square Financial Services, which holds the Industrial Loan Charter.

Block executive and business leader Owen Jennings said in an interview that the cash app is turning its attention to major banking partners in U.S. households.

“Our long-term goal is to be a major provider of banking services for the vast majority of Americans,” Jennings said. “To do this, you need to go from a simple peer-to-peer app to a full-fledged suite of banking services in terms of reputation and brand recognition.”

This goal is ambitious, but cash apps have been making some progress. The number of cash app users who deposit their salaries directly into their accounts reached 2.5 million in December, a year-on-year increase of 25%. Analysts looked at the metric carefully because users who set up direct deposits are more likely to spend on their debit cards and log in to other products through the app.

“Low deposits on long-term direct deposits on fintech are indeed the holy grail,” said Mark Palmer, senior equity research analyst at benchmark firm. “The key is to choose to deposit one’s salary directly into a cash app as compelling as possible, which does boil down to the variety of products on the app. We’ve seen Block become increasingly aggressive in enhancing that product.”

Similarly, growing direct deposits are a key goal for PayPal Holding Inc.’s Venmo, and over the years, the company has also been working to transform more than 90 million active users into profitable customers, a focus for its new CEO, Alex Chriss.

“If you are going to have 57 million people, you should announce your victory and start figuring out how to make money,” said Bryan Derman, managing partner at Glenbrook Partners, Payments Consulting. “This is the version of the same challenge Paypal has against Venmo.”

Cash App’s revenue comes from transaction fees for Bitcoin, exchange of debit card expenses, stock purchase fees, loan interest and fees for instant transfer to external bank accounts. The company also gained a bit of interest from user balances deposited by its banking partner Wells Fargo & Co.. In 2024, Cash App users will invest $283 billion worth of inflows into the app.

Chief Financial Officer Amrita Ahuja said on the company’s fourth-quarter earnings call that the company currently has 5 million monthly active activities due to its short-term loans that provide cash application borrowing. Ahuja added that it plans to increase the number by providing higher restrictions, improving coverage, integrating services with direct deposits and expanding them to more states. She said it is also working to launch and develop backend services on its cards.

“That’s where they want to make money,” said Shruti Shah, a partner at Symphony, a pre-seed investment firm. “You make money through credit cards, credit card exchanges, and then interest rates. That’s how financial institutions can increase their income.”

Part of the challenge of winning and retaining bank clients is convinced that cash apps are a safe choice for major banking partners. Earlier this year, the Consumer Financial Protection Agency ordered the cash app to refund up to $120 million in consumers and paid $55 million to the agency’s victims’ relief fund after the fund found the parent company’s investigation of fraudulent, unauthorized cash app accounts was “very incomplete.”

In a statement released after the settlement, Block explained that unprecedented growth during the pandemic has tested the company’s customer service. Since then, Block has invested heavily in customer support and problem-solving, the company said in a statement.

In January, Block also entered into a settlement agreement with nearly all state regulators, in which it owns a currency transmitter license related to its anti-money laundering program. The business is in ongoing negotiations with the New York Department of Financial Services.

“I’m not worried about compliance, especially in the current government,” said Dan Dolev, senior analyst at Swiss Securities. “The challenge is to be profitable, and these people usually don’t make money often elsewhere.”

This article was generated from the Automation News Agency feed without the text being modified.