This post was originally featured on Reforming Retail.
If you follow @Jack on Twitter, it’s no secret the guy is incredibly bullish on Bitcoin. On the surface, it’s seems quite odd that someone who owns a centralized social media platform (Twitter) and a payments processing company (Square) would be cheering on cryptocurrency as the future of commerce. After all, blockchain technology and cryptocurrency both stand to make his businesses obsolete in the coming decades. So, what’s going on here, Jack?
When you dive in deeper, you start to understand the challenges that he may be facing at his current ventures. Let’s start with Twitter as an example. While Twitter has been a leading social media platform for over a decade now, the traditional ads platform model could be described as a legacy model. Moreover, Twitter’s handling of censorship and essentially silencing anyone that doesn’t agree with their political agenda has had serious repercussions for the platform. Simply put, some people refuse to use the service because they have lost trust in Twitter as a company. The same can be said for Facebook and Google.
Jack has been vocal about his understanding that the future of social media doesn’t depend on harvesting consumer data in exchange for profits. Jack believes the future is decentralized. In fact, he’s publicly stated that if a native currency for the Internet was born when the Internet was born in the 90’s, traditional ads platforms may have never existed. While we all use social media to connect with one another, most people will agree that ads aren’t cool. That said, owning a social media company is expensive and running ads to a captive audience is an easy way to monetize to your platform.
Jack’s other company, Square, has been on an absolute tear ever since they landed on the scene back in 2009. Silicon Valley was quick to recognize the payments behemoth as the next big “unicorn” back when they were simply a first-of-breed mobile swiper built for smart phones. Today, Square is much more than a payments company. They have evolved into a cloud-based ecosystem offering both offline and online merchants tremendous value through their various different software offerings.
Most recently, Square announced an all-stock deal to acquire an Australian buy-now-pay-later (BNPL) company called Afterpay for a whopping 29 billion dollars. This news came as a bit of a shock considering Square is essentially betting 1/4th of their entire company on this acquisition going smoothly – their current market cap is roughly 120 billion dollars.
From the looks of things, Square is in a very competitive position to continue disrupting the payments landscape and adding value to their sellers. So, why would Square and Twitter potentially merge?
Since inception, Square has always made it their mission statement to provide tools and technology to help everyone participate in their local economies. While an admirable mission statement, Square is falling short in their attempts to truly accomplish this goal. The current banking system makes it incredibly difficult for companies like Square to be nimble and move into underserved countries at the pace that they would like to. As a result, Square applied for their banking charter several years ago and they were just recently approved by the FDIC to begin operations out of Salt Lake City, Utah.
While being able to offer traditional loan products and banking services to Square sellers is a natural extension of the business, it doesn’t solve the core problem going on over at Twitter which is, many people don’t trust Twitter anymore.
Jack was highly scrutinized at the Bitcoin 2021 Conference by one of his critics who frankly had some valid points. She asked, “How can you say this is a currency for everyone in the world when you are the king of censorship?”. While this individual wasn’t very composed, she presented a pretty good argument that Twitter stands for all the things that Bitcoin does not; censorship, harvesting consumer data, centralized authority, etc.
So, how could Twitter regain the trust of their users? The answer is to do something that has never been done before which is to disrupt the traditional advertising model. One way this could be made possible would be by moving the entire platform over to a decentralized blockchain network such as the Lightning network. The Lightning network is striving to solve Bitcoin’s scalability problems by offering a layer-2 payment protocol allowing for fast transactions of micro-payments on a global scale. Jack recently made mention of the Lightning network on his Twitter page to protect routers or node operators from unnecessary regulation as part of the highly debated US infrastructure bill.
Imagine if you could take a payment’s giant and a social media giant and merge them into a decentralized social platform in which anyone could transact in real-time across a global network. This would certainly help underserved countries gain access to participate in their local economies because all you would need is a smart phone and Internet connection. Not to mention, the opportunities would be limitless when it comes to adding new payment features for Square.
Just think about the doors this could open by empowering anyone to be able to transact on a global scale, instantaneously. Today, it’s very expensive to send an international wire. It could cost anywhere from 50-100 US dollars to transact internationally. As a result, people do not transact using micro-payments. Moving from Twitter’s current infrastructure to the Lightning network would allow for micro-payments on a global scale. Why is this important, you ask?
Here are some examples of how this technology could change the way we view and interact with social media platforms:
Smart Contracts: You could use Smart Contracts to enable instant payments. For example, you could take your fundraising efforts global and reward ownership to people investing in your business.
Tipping: You could tip people for quality content you appreciate such as a video from an aspiring musician. As opposed to “liking” a post which was created to harvest consumer data, you could toss someone the equivalent of $0.01 using Bitcoin.
Charitable Donations: Most fundraisers are centralized meaning they typically incur high transactions fees which leads to higher “minimum” donations. This likely defers people who would like to donate to the cause but may not have the funds to do so. With micro-payments, you could attract more donors and remain anonymous to avoid any social anxieties about your donation.
Content: Today, most valuable content on the Internet is downloaded using an email or phone number. Most consumers don’t want to offer up their personal information so a good alternative would be for that company to instead get paid $0.05 for the content.
If Jack were to equip every Twitter account with a wallet tied to the Lightning network, he could bring humanity one-step closer to realizing Bitcoin as the native currency of the Internet. The question remains, how would Twitter and Square monetize their platforms if they would essentially be doing away with the ads revenue at Twitter and payments processing revenue at Square?
First, we must look at each company’s 2020 revenues to present some viable options.
Twitter closed out 2020 with 3.72B in revenue.
Square closed out 2020 with 9.498B in revenue.
Let’s start with Twitter. While there are many ways in which you could monetize a decentralized social platform, I think the simplest route would be to charge a $4.99/Mo. subscription fee for consumers and $9.99/Mo. for businesses. They could also consider a hybrid model where they would charge for services such as Smart Contracts that would execute agreements for a heck of a lot cheaper than it is to hire a lawyer.
According to Twitter’s shareholder letter, they have 199 million monetizable users on the platform. In order to make up for their lost revenue, they would need to get roughly a 32% adoption rate of paid users in order to exceed their 2020 revenues (199M x 0.32)*($4.99 x 12) = 3.8B.
While convincing 32% of users to commit to a nominal monthly fee could prove to be difficult, you would likely draw a lot of new users to the platform if you could transact for free globally and have peace of mind that your data isn’t being harvested and sold. The real challenge is execution. Transacting would need to be so easy that your grandma could do it which is not the case for most crypto wallets and exchanges today.
As for Square, payments processing is expensive, and it wouldn’t be easy to realize an average customer value of $4,749 (9.498B revenue / 2M sellers) per year if you stopped collecting processing fees. While only 80% or $3,800 is likely from processing, where do you find that kind of revenue?
By offering Square sellers the ability transact globally, it would open doors to new ways in which they could offer their products bringing a lot more sellers to the platform. For example, non-fungible-tokens (NFT’s) could play a unique role in the social component of merging the two companies.
As an example, an artist selling their artwork could also create a non-fungible-token to be transferred to the purchaser of their artwork. As such, this would give the purchaser exclusive ownership over the artwork until they decide to sell it. What’s unique about this is, the original seller could actually earn a royalty on the NFT for the lifetime of the product. If you think about it, it adds the element of rarity to the artwork much like a signed baseball card that is scarce in supply. While that is just one example, NFT’s could open the doors to entirely new revenue streams for Square sellers.
Another example would be a professional sports team issuing tickets to their events. If each ticket was tied to an NFT assigning exclusive ownership of that ticket to an individual, the tickets could ultimately increase in value. Imagine you still had a ticket from 1937 World Series. That ticket is likely worth more money today than its initial purchase price due to its rarity. An NFT can turn the now digital tickets into royalty collecting assets for the merchant and generate potential profits for the consumer should they resell the ticket.
Aside from NFT’s, I think the real value for Square sellers would be the decrease in payments processing fees overtime. It could be decades before everyday consumers are opting to pay with open-source wallets or their Twitter accounts. That being said, we do expect market share to slowly transition from the traditional payment rails to the blockchain ledger via cryptocurrencies. For merchants, this means the 2-4% they are paying to accept credit and debit cards will slowly start to erode.
If the average merchant is paying Square $3,800 in processing fees annually, we have to assume they are paying closer to $10,000 in total credit cards fees annually when you incorporate interchange fees. Overtime, that potential $10,000 in fees could go away allowing Square a nice budget to offer valued-added services in the form of SaaS or software-as-a-service.
Today, Square charges software fees for their marketing, loyalty, gift cards, payroll, and a number of different services. Overtime, as their seller’s payments processing fees decrease, they need to offer additional services such as banking products in order to get their monthly merchant billing back up to $300-400 threshold. Be mindful, while the merchants could be paying more for software services overtime, they will be paying significantly less than before since they don’t have to cough up 2% in interchange fees to Visa, MasterCard, Discover, and Amex.
Square’s Cash App alone has 36 million users in 2020. While these are consumers, not sellers, this could be a huge opportunity for Square to morph their Cash App into an open-source wallet for online banking. This product could also be used for their 199 million Twitter users. Once they have the consumers under their banking umbrella, they could use data from their checking accounts to promote their traditional banking services to these consumers such as car loans, mortgages, etc.
For example, you could automate a push notification that says, “Greeting Mr. Smith. We analyzed your checking account, and our Automotive Loan Experts believe you are overpaying on your vehicle. Today, you are paying $449.53. Would you like to see our savings analysis? If so, click to be connected to view your new offer.”.
We don’t know exactly what Twitter’s intentions are with the Lightning network, we are simply speculating what’s to come over the next couple decades. Please leave your thoughts below as we are always curious to hear everyone’s feedback. If you enjoyed this article, be sure to like, share, and of course follow for future content.