Cash App (2013)

“Inverting: Instead of asking how to beat traditional banks, ask what do traditional banks hate?”

Market Opportunity. It is 2013 and I know that traditional banks hate the bottom 40% of the market as it costs them $300 a year just to keep the lights on for a checking account. If a customer only has $400 in their account, the bank loses money on them every single day. The bank wants these customers to leave. They punish them with overdraft fees and high interest to break even.

This created a vacuum. A massive, unsatisfied demand from 140 million people (Millennials and Gen Z) who are digital native and have low traditional banking habits. If I can launch an app (Cash App) and reach up to them early, I can make them sticky throughout their life and expand products based on their needs.

The Maths: In 50 years, if I can capture half of this market (70M), the cash flow will be so immense that the market cap will take care of itself. With net profit of $100 per head after accounting for inflation over these 50 years, that’s $7B of net income. If I manage to keep growth and good returns to shareholders, the Cash App should easily worth $100B.

“Invert, Always Invert: How to Guarantee Failure”

If I wanted to destroy my Cash App business from day one, here is what I would do:

• Compete on traditional banks’ terms: I would try to beat traditional banks by offering slightly better interest rates or building prettier branches.

• Adopt their cost structure: I would hire thousands of compliance officers and tellers, ensuring my cost-to-serve matches the incumbents, destroying my only advantage.

• Look like a bank: Make customers associate Cash App with the stress of overdraft fees and mortgages and lose the psychological war.

• Profit from misery: I would rely on "gotcha" fees (overdrafts) like the banks do. This creates an adversarial relationship.

• Asset heavy: I would lend my own balance sheet to unstable customers immediately.

I would need avoid the above stupidities in running the business.

Innovator’s Dilemma: Velocity v.s. Duration

• The Bank’s Model (Duration): They make money by holding deposits and lending them out over time. This requires massive capital, heavy regulation, and expensive branches.

• My Model (Velocity): I don't want to hold the money and I want to skim a tiny fee on the movement (Interchange) or the speed (Instant Deposit). Cash App competes on Velocity: moving money to skim a fee at the beginning before I move upmarket.

I know the incumbents would not compete with me as their highly qualified management teams will look at my "micro-transaction" business and sneeze at it as it would lower their margin.

By stripping away the branch and the marketing budget (relying on viral P2P growth), I could drive the CAC to near zero. This allows me to turn a customer who is "unprofitable" to traditional banks into a goldmine for me.

Elementary Worldly Wisdom To Get 70M People into the App

To get 70M users, I will initially solve a problem banks ignore but that occurs frequency among the young cohort: the friction of small, immediate payments between friends and let them do the marketing for me. To get a flywheel effect, I must create conditioned reflexes by imprinting a new neutral pathway to make the youth cohort to form habits with Cash App

• Pavlovian Conditioning: I will engineer a dopamine hit. The notification sound of money arriving is the bell and will make users associate the app not with "banking" but with "friendship".

• Social Proof & The Network Effect: The "$Cashtag" turned a utility into a social signal. If an user want to send his friend money, his friend must join the network. It is a viral loop driven by the "Monkey See, Monkey Do" tendency.

• The Consistency Principle: I capture them young and imprint a neutral pathway. I will stack financial products that I see fit based on the data I collected of the segment (low value lending, instant liquidity) and combined them into a single frictionless interface to a captive audience that trusts Cash App more than their primary bank by leverage the Principle of Least Effort. By the time they make real money, they won't switch to traditional banks as the human mind hates change. It is the "Principle of Least Effort”.

Eventually, every bank will copy our P2P feature but by then, I would have built a strong network and habit effect. It is nearly impossible to un-train a muscle memory. If Cash App becomes the "operating system" for a user's financial life, the switching costs become psychological, not just financial.

In addition, while the banks ignore these "low value" customers, I am gathering data on their spending habits. I can use this data to create innovative products that address the users’ specific needs before anyone else on the market.

"How do we ensure this business survives for 50 years? I must solve the problem of generational transfer.”

• The 'Sugar Water' Analogy: Just as Coca-Cola made its product ubiquitous to children to ensure they became lifelong consumers; I must introduce the digital wallet before the next generation user even has a bank account. By launching 'Cash App for Families', I can capture next generation user at the moment of 'market inception.'

• Neural Imprinting: When a young adult receives their allowance on Cash App, their brain forms a physical association between 'money' and Cash App’s interface.

• The Consistency Principle: By the time they become adults, the neural pathway is already paved. I no longer need to convince an adult to switch banks; I are simply upgrading a child's allowance tool into an adult's salary account. This is the ultimate Lollapalooza effect—capturing the customer at market inception.

Square Ecosystem (2009)

“Inverting: Instead of asking how to beat incumbents (First Data, Chase Paymentech), ask what do these incumbents hate?”

In 2009, the incumbents run a commodity volume business. They earn a thin spread (0.10% – 0.20%) on billions of dollars from giants. Their entire model is built on scale, not service. They hate the "long tail because serving a small merchant costs more than the profit they would ever generate.

In 2009, this created a market failure. There were 21 million "non-employer" businesses in the U.S. generating $840 billion in receipts, yet 55% of them were cash-only.

The Solution: I don’t just build a card reader; I automated the underwriting. By dropping the onboarding cost to $10 (the cost of a dongle), I can serve the customer incumbents hated, charge a premium (2.75%), and still keep a massive spread (~1.15%) because I will have no competition in this segment. Once Square build a reputation among the small merchants and learn from experience to build a seamless ecosystem, I should be able to move upmarket.

The Maths: If I capture just 30% of the "ignored" $840 billion market over the next 50 years, assuming modest growth, I will be looking at a business generating $7 billion in annual net income. At a modest 10x multiple, that is a $70 billion enterprise built on the scraps the banks threw away.

“Invert, Always Invert: How to Guarantee Failure”

If I wanted to destroy my Square business, here is what I would do:

• Compete on price. Try to undercut incumbents on rates.

• Act like a processor by just moving money and treating the business as a commodity.

• Sell to the high volume Whales.

Innovator’s Dilemma:

• I will enter the castle disguised as a harmless toy (the dongle) and solve the immediate pain of "I can't take cards" of small merchants.

• The Lock-In (Switching Costs & Loss Aversion): Once merchants are in, I will expand the ecosystem and make Square the brain of the business. Square will manage their inventory, their payroll, and their customer database. Given Square becomes the brain of the business, I can introduce low valued loans based on real-time flow, not outdated tax returns. I can deduct repayments automatically from daily sales and thereby lowering the risk. It solves the merchant's cash flow problem and locks them deeper into our ecosystem. A merchant who owes us money is a merchant who will never leave."

• The Moat: To leave Square, a merchant doesn't just switch processors; they have to rip out their entire business system. The pain of leaving exceeds the benefit of saving a few % on fees. This is a high switching cost moat.

• Competition: Large acquirers unlikely to compete with me as their most profitable customers are mega sized merchants who do not need software provides by the payment processors. From incumbent’s management perspective, it’s silly to build an ecosystem (likely complex for their customers) who do not need them.  

Ultimate Endgame

The "Closed Loop" Grail by connecting Cash App and Square, which creates a Self-Reinforcing Lollapalooza through network effect and significant margin expansion through the use internal ledger and capturing the entire 2.75% fee.