A tale of two ecosystems: Square 10K

After some time I had the opportunity to go through another 10K analysis with my fellows of the Fintech product guild. This time we decided to analyze Square.

I heard a lot about Square in the news recently but, as I am not based in the US, I didn’t really perceive it as a consumer product and I expected to find a SMB-first company that eventually launched a retail product. 

I discovered a much different reality. Square includes two very strong propositions: a Seller one, and a retail one – Cash App. They live under the same company umbrella, but they are solving two completely different problems.

Income Statement

Last year was pretty good for Square: the company grew a lot and managed to face COVID quite well: total revenue doubled (+101%) and the gross profit grew (+45%).

The operating costs grew in line with the revenues’ growth, especially on product development and sales and marketing: the company is betting on its growth and it is investing the extra revenues in acquiring new users and building new features. 

Looking at the group Income Statement a few other elements caught my eye: first, the explosion of the ‘Subscription and service-based revenues’ (+45% yoy), which is mainly driven by the Cash App adoption and usage of Instant Deposits and Cash Card; second, the evidence that Hardware is a pure acquisition feature for Square Seller, with a loss of approximately 50M in 2020.

Being Square a transactional business, it is interesting to zoom in on the Transaction-based revenues: the Gross Processing Volume grew even though less than 2019, probably impacted by Covid; the Gross Profit went better, mainly due to the increase in card-not-present transactions [+26% vs -4% of card-present txs] which are more profitable for Square.

The ecosystem creation playbook

To fully understand Square it is very useful to analyze the different behaviours of the two sides of Square’s business: Seller and Cash App. 

The Seller side growth was severely affected by COVID (especially by a terrible Q2-2020) that flattened its growth (Gross profit growth from +30% to +8%) but remained solidly profitable with over $1.5B of Gross Profit.

On the other side, Cash App exploded with 3 digits growth in each of the revenue streams: Transactions, Subscriptions and Services, and Bitcoin.

The Bitcoin feature was the hit of the year: 3 million users bought BTC through Cash in 2020, and 1 million in January 2021 only. Bitcoin revenue went up over 700% but so did Bitcoin costs, as the company recognizes as revenue the sale amounts received from the customers and as a cost the associated bitcoin cost – essentially neutralizing the impact on the IS. 

What really jumps out is the impressive +125% of the Subscriptions and services-based revenue, made mainly through the wider adoption of 2 core features of Cash App: Instant Deposits and Cash Card. A strong usage pushed up by the massive growth in MAU of the app.

Overall, what seems evident from the analysis is that the core value that Square brings to the table is its mastery in building new ecosystems around an underserved customer base. 

They really defined a playbook for ecosystem creation and they are applying it to the SMB customer and to the retail one. In my understanding this playbook works as follow: 

  • Identify an underserved user, who has a very fragmented financial experience based on stitching together products and services from multiple vendors (probably not digitised yet)
  • Focus obsessively on a core pain point for this user: Card payments for SMBs, P2P transfer for consumers
  • Use that core use case as an acquisition feature
  • Build a constellation of profit generating services around to deliver a ‘cohesive, fast, self-service and elegant experience’

Seller and Cash App are nothing else than two iterations of the same playbook, only at different stages of maturity: Seller quite mature, Cash App still in exponential growth.

Looking at the future

The future looks brilliant for Square.

In the short run, the growth of Cash App is obvious and I believe they are only at the beginning of the journey: Cash App can become the dominant wallet in the US and, given its positioning in the crypto space, it also has the features and the sophistication to intercept new developments in the financial ecosystems – something very hard for traditional banks but challenging also for most of the consumer Fintech companies.

Also, the company just closed the Tidal deal which brings many opportunities in the music and creators space: creators can become another underserved user to build an ecosystem around – more in one of my latest posts.

Looking at the long term, I believe that Jack Dorsey’s vision is to connect the Seller and Cash App ecosystems to originate a new closed loop payment network – eventually based on blockchain rails – fully disintermediating Visa and Mastercard. The company has everything in place to do it: it is quickly ramping up the two sides of this 2-sided marketplace (sellers and consumers) and building two extremely solid customer bases that, once integrated, could create a financial giant very hard to compete against.


Shopify, e-commerce eats finance

The last session of the Fintech Product Guild `10k-a-month club` was centered around one the most interesting companies in circulation: Shopify.

Shopify was established with the goal of making e-commerce very simple for anybody: the company provides a set of tools to bootstrap an online shop and essentially remove a lot of technical hurdles from the setup of an e-commerce, letting entrepreneurs focus on the commercial side of the venture.

Recently, they started adding a comprehensive set of financial features to their product, embodying the paradigm of embedded finance that I already touched in one of my previous posts.

The goal of this post is to deep-dive into these features and analyse their strategic impact.

Financials analysis

Income statement

Shopify grew massively in the last 12 months, reaching over 1 million merchants on the platform and a GMV (Gross Merchandise Volume) of more than $60bn. 

This is obviously an insane number, but it’s still less than a third of what Amazon generates through its Marketplace business, and less than 20% of Amazon’s entire GMV .

Shopify vs Amazon GMV – Source: MarketplacePulse

That GMV translates into $ 1.5 B revenues split between subscription and merchant solutions.

The subscription product is essentially the access to the e-commerce platform and was crucial to jumpstart the company, but the merchant solution is where the company is investing more and where they probably expect to build a moat.

Shopify Income Statement common size analysis

Merchant solutions now accounts for 59% of Shopify’s revenues, and counting. This line includes a constellation of extra services that support the merchant in many non-commercial activities, such as:

  • Shopify Payments 
  • Shopify Shipping and Fulfillment
  • Shopify Capital

Balance Sheet

Shopify’s balance sheet is really a fortress with minimal leverage and a lot of cash available.

Shopify Balance Sheet common size analysis

Statement of Cash Flows

Shopify’s statement of Cash flows is very insightful, as it really shows a company in its growth phase: the financing flow started to go down but is still very strong, the operating flow starts to take off and the investing one is diminishing but still deeply negative.

Shopify statement of cash flow, in the company-stage SCF curve

Leveraging the platform: embedding finance

The last Shopify Reunite saw a number of announcements with Money and Financial features at the centre of the stage. Many of their products pose a direct threat to many incumbents and pure Fintech startups:

FeatureThreat to:
Shopify balance: A business banking account and loans for merchants. No fees or minimum balances. This will include a Shopify customized virtual and/or physical debit card and cash-back cardsRetail banks, neobanks for SME. Any new e-commerce will probably use either Shopify or Amazon. They will easily be acquired also on the banking side.
Shopify Capital: The company expanded their lending infrastructure. Lent $1 billion to merchants so far, in ticket sizes ranging from $200 to $1 million.Retail banks, SME lenders.
See above, only for lending (with better underwriting opportunities).

They also announced some customer-facing features that want to rival with more customer facing brands:

  • Installment payments via Shop Pay, with the option for users to break purchases into 4 even payments at 0% interest.
  • Shop App: Less fintech and more Amazon competitor, with better merchant features and 16 million users so far.

To be honest, I’m very skeptical about this consumer-facing twist: first, building a consumer brand that rivals Amazon or even Facebook is extremely complex and defocusing for a platform company; second, and more important, this also introduces a mismatch of incentives between Shopify and its customer base: the merchants. 

One of the perceived value of Shopify over Amazon, is the fact that Shopify is considered a tech partner that doesn’t want to screw you up because it doesn’t consider your margin its opportunity. This partnership narrative may be at risk in a more prominent D2C role.

Looking ahead

Shopify is an extremely solid company, with a great outlook for the future. They are placing themselves at the center of the future of commerce, providing a comprehensive infrastructure that makes the life of the merchants much easier, and let the company focus on serving customers better and with minimal financial and logistic hussle.

Their focus on financial features is the nth signal that embedded finance is a key trend that also other platforms are embracing (see Amazon partnership with Goldman Sachs). 

In this world, incumbents and pure fintech startups have to find a way to clearly define themselves, but I’ve already tackled this point 🙂 .


Adyen, payments made easy

As my fellow Product Peon taught me a long time ago, the best way to learn quickly how a specific company works, is to analyse its 10k. For this reason, in the Fintech Product Guild, we decided to start a ’10k-a-month’ club. This month we analyzed Adyen, a payment company.

What does Adyen do?

Adyen was founded around 15 years ago to facilitate the adoption for merchants of electronic payments. At that time, the payment chain was extremely fragmented with multiple players coordinating different pieces of the chain: gateway, processing, risk management, acquiring (more on the evolution of the payment industry here). Adyen approached the problem from a different perspective: they built a merchant centric product, a payment-as-a-service infrastructure which essentially made the process of accepting a payment much easier for their merchants.

The venture went very well, they secured a lot of fundings and went public in 2018. Today Adyen is a public company which offers a payment platform to support the growth of its merchant through various ways:

  • a wide range of payment methods accepted
  • quick plug and play scalability in new countries
  • user-centric checkout solutions to improve merchant conversion rates
  • fraud prevention

Financials analysis

Income statement

Over the last 3 years Adyen saw a sustained growth, with its total payment volume growing 1.5x from from 2017 to 2019 that directly transacted into a 2.5x growth of the net revenues.

Adyen total payment volume and net revenues

Their revenue model is based on four elements:

  • Settlement fee: % of the value for acquiring services (to be netted of interchange fees)
  • Processing fee: fixed fees (10 € cents) paid when a transaction is initiated via the Adyen payment platform
  • Sales of POS (Point of Sales)
  • Other services: exchange service fees, 3rd party commision

From a gross revenue perspective, the settlement pillar appears as the dominant component of their business, with a contribution of more than 85% to the total revenues.

Adyen revenues split

Anyhoo, the situation looks different when we consider the net revenues component.

Adyen revenues split with common size analysis over net revenues

In reality, considering their holistic approach to payments, it is obvious how each component of their product self reinforce the others: they offer a single package which aims at solving every problem of the payment cycle and each business line should be analysed with these lenses – losing a few millions on the POS business is a no brainer, when this will lock in the merchant and guarantee extra Billions of € of transactions on the platform.

Adyen income statement with common size analysis (over net revenues)

Overall, they show a pretty solid growth of revenues and a very strong operating margin (over net revenues), which sits around 51%. This is a very healthy margin, especially when compared to other competitors in the space.

Main payment providers operating margin

Adyen’s growth over the last years has been impressive, but this must be contextualized in a favorable trend for the entire payment industry. The revenues of the global industry more than doubled in the last decade and the expectation, based on McKinsey Global Payment Report, is that they will grow even further in the next 3 years.

In this already positive wider environment, Adyen benefitted even more from the shift away from cash towards electronic payments – with a total number of non-cash transactions almost doubling in the last 5 years.

Balance sheet

The biggest insight deducible from the BS is that, not surprisingly, payments is such a liquid business! 67% of Adyen assets are in cash or cash equivalents, and 19% are Receivables for a total 86% of current assets.

Adyen balance sheet with common size analysis

Looking at the common size analysis, the sheet shows a strong continuity with the previous year. Most of the items didn’t significantly change from 2018, with a clear organic expansion of the BS.

Statement of Cash Flows

The SCF is in line with the growth story told by the Income Statement and Balance Sheet. Adyen presents a positive operating cash flow which grew steadily in parallel with the net profit, with minimal net financing and investing flows.

If we abstract that trend and represent it in the typical cash flow curve, we identify a company in its late growth/maturity phase: a company which is producing strong operating cash flow, it’s not highly negative on investing anymore but it is also not distributing back to investors yet.

Looking ahead

Adyen’s financials describe a company in great shape and ready to scale its business further very quickly. Even though it is playing in a crowded industry, the Dutch company is in perfect position to become the go-to payment platform in particular for enterprise customers who want a modern, digital-first payment infrastructure – less so for SMEs who would probably look at more self-serve platforms like Stripe.

The recent pandemic will probably only accelerate their growth, due to the obvious shift to digital products of many users, a segment where Adyen is much better positioned than many incumbents in the space.

Overall, Adyen is definitely a solid company with a very scalable business model and a promising future.



Payment industry maps: