Follow Up: Square's Walled Garden
Couple of points of clarification from Monday’s article. I don’t think I was as clear as I could have been about why building a closed loop payment network is such a big opportunity for Square. In particular, I’m going to focus on how building this would start turning a flywheel that leads to growth for both the Cash App and Seller ecosystems.
An initial reduction of fees from Square operating its own payment network would then cause benefits to accrue to Cash App users and Sellers in the following way:
Sellers:
Lower fees
Better customer acquisition channels
More transactions
Cash App users:
Higher cashback when purchasing at Sellers on Square’s ecosystem
More selection of Sellers
Better and more promotional offers
As more Sellers on-board and Cash App users become more engaged, costs for maintaining Square’s closed loop payment network can be spread over an increasing amount of transactions. As transactions increase, the costs per transaction decrease. The efficiencies gained from scale can be further passed on to Cash App users and Sellers, resulting in another turn of the flywheel.
Building a Closed Loop Payment Network
Square has a long way to go to realize this vision. It’s a hard thing to build a payment network. It takes years to increase the acceptance of your network with merchants and to get customers to pay using your network.
Square isn’t there yet. Building a closed loop payment network that has less than 20% of the acceptance of the major payment networks isn’t exactly a winning proposition for Cash App users. Who would switch their spending on to a payment network that isn’t as widely accepted?
Realizing this vision will require Square to increase its penetration among merchants with its Seller products even further.
I have an idea on how they could do that with a strategic acquisition. But I’ll save that for my next newsletter.
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