Long Take: Unlocking Demand-side growth with Square's payment network and Goldman's GreenSky acquisition

Hi Fintech futurists — this week, we cover the following:

  • Thesis: Square upgrades Cash App into a payment processing powerhouse, completing the loop between the consumer and merchant side of the house. Goldman Sachs acquires GreenSky, adding a lending business at the point of intent. This analysis connects these symptoms into a framework explaining the increasing integration between commerce and finance, and the increasing role that demand generation plays. That in turn explains how the attention and creator economies interconnect with financial services.

  • Topics: paytech, digital lending, neobanks, social & community, big tech, super app

  • Tags: Square, Goldman Sachs, GreenSky, Google, Tidal, United Capital, Visa, Mastercard, Ant Financial, Mass Mutual, TikTok

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Long Take

The Financial Economy Framework

We are working on an updated understanding of the financial economy, and the following analysis is a work in progress building on a core insight that we have shared in the past, and as part of our work at Autonomous Research and ConsenSys. It also tightens up the logic in the end of our previous piece on Square and Tidal, as well as ongoing research into creator economies.

The starting point is to say that there is (1) manufacturing, and there is (2) distribution, and some stuff in between called a value chain. Fintech has done a fair job of putting distribution into mobile phones out of bank branches, and now we have a dozen unicorns all trying to shove themselves into a SPAC market. Manufacturing has lagged behind, outside of the high-frequency trading and data aggregation themes, with some AI pixie dust on top to make underwriting faster. The middle office is getting digitized, but end of the day it will be *just* the middle office, and compressed by either the top or bottom of the value chain.

The other dimension is to split financial products — since that is what we are manufacturing and distributing — into their respective industries or use cases, like payments, banking, capital markets, investment management, and insurance. You can see how that maps to timeless human behaviors, whether now or 500 years ago.

Further, we can be a bit more precise and say that some activities are (1) money in motion, and some are (2) money at rest. Payments and trading require a lot of exchange, and charge on volume of activity. This is the exchange of information that has been abstracted from real world goods into financial goo, which we abbreviate as “value”. Payment networks and market venues are as close to manufacturing here as you get. On the other hand, bank deposits and wealth management accounts deal with capital sitting in place, and charge on the assets. The closer you are to a custodian, or *gasp* a blockchain, the more irreplaceable you are in the manufacturing business, with the rest being “value add”.

So far so good. But the world is more complicated, and what we have really described is still just the shape of *Supply* in terms of the Supply & Demand curves for a financial economy. If we add *Demand*, and the functions underlying Demand, things start to make sense relative to the slippery terms like “the Metaverse”, attention economy, and creator economy.

There you go. We can of course go endlessly deep into trying to understand consumer behavior, generational change, and how media and entertainment define and impose taste, and the associated shape of the demand function. One can get lost in a discussion of *what* demand function we are talking about, because there are billions of them stacked recursively on top of each other — capitalism demands it. At many points in many value chains, there are capitalistic clearing mechanisms on top of local markets (in the mathematical sense). Putting a bonding curve on your Ethereum NFT mint is simply making explicit the implicit, qualitative market mechanisms we engaged on an ongoing basis. It is a software approximation for the laws of nature.

Further, the Internet itself has come to represent “Demand”, capturing all intent, with content and social media becoming structured around that intent. We know that intent is a very profitable business, and that sitting at the edge of Commerce — which is the rugged tug-of-war between Supply and Demand across all products — yields massive, trillion-dollar marketcaps that make every bank look like an anthill at the bottom of the Grand Canyon.

JP Morgan generates $120 billion while Google makes $180 billion per year. The market capitalization of the bank is $500 billion compared to Google’s $2 trillion — rough order of magnitude. Anyway, we have been living in the land of intent for about 2 decades, such that demand itself was productized, commoditized, and monetized, which was cynically referred-to as the attention economy. Now, the shape of demand is being revealed even more deeply by a focus on the people who *create* the opinions and utility functions that result in the creation of intent by the masses.

When Elon Musk tweets about Dogecoin, he is (1) a creator that is (2) mobilizing his community by structuring their (3) intent to engage with the (4) distribution chassis of Robinhood to buy (5) Dogecoin manufactured onchain. You should see the difference between that and a financial manufacturer creating some product and then paying for marketing upstream into a wealth management industry structure.

This realization makes the error of things Mass Mutual having to pay $4MM for failing to supervise Roaring Kitty in shilling GME stock or the hand-wringing over investment banking analysts quitting to make $500k on TikTok talking about day trading make more sense. Manufacturers regulate like manufacturers. They think about distribution like manufacturers (i.e., hoping the factories are safe but never change).

People who shape demand by shepherding a community are not that. Instead, they are cultists, shamans, and priests. Of course a rock star is more valuable than an Excel monkey. We say this as really good Excel monkeys ourselves.

Look, this mapping is far from perfect, but we think it is at least useful. The main thrust is for everyone to work on perfecting the granularity with which they think about Demand. The goal isn’t just to “create marketing strategies” using a Swiss army knife of marketing functions and capabilities. Rather, the goal is to understand how to structure a business that incorporates the Demand function of its likely customers, which implies thinking about more than just distribution mechanisms. It should likely augment our view of acquisition strategy for non-core but novel business combinations as well.

So let’s take this framework out for a drive on a couple pieces of news.

Square and the Payment Network


Square Offers Sellers and Consumers a New Checkout Experience with Cash App Pay.

Square is really the only fintech with the audacity to play in every part of the meta-structure of their addressable markets. Remember that the company started by selling a physical dongle that plugged into a smartphone and a Visa card network. This was an arbitrage in the micro-business payment processing market — a commercial activity that few players wanted to serve due to small transaction volume and complexity of hardware.

Notice however that by developing a position in commercial activity, Square can build out into merchants and consumers on the Demand side. And then on the manufacturing side, it can move from money-in-motion to money-at-rest, as well as deepen from middleware to real manufacturing.

Here we map the explanation to the framework.

Unlike other payments networks that are trying to be maximal networks-of-networks, Square’s execution shows its deepening relevance to stakeholders on both side of the commerce that it powers. A person won’t have any *feelings* about using a traditional card network like Mastercard, as it functions like Intel Inside. But they will likely have positive feelings about using Square.

Tidal allows Square to plug into creators with communities. That in turn leads to powerful distribution mechanics of the consumer app, as well as adoption in response by more merchants. That leads to more money in motion, which then ends up at rest, and recycled through investment into more commerce. Of course, this was almost literally the execution path of Ant Financial — though in different order — before Beijing blew it up into pieces for being too systemically important.

Goldman Sachs to Acquire GreenSky, and sell some debt

Another example we want to share is this — Goldman Sachs to Acquire GreenSky.

It goes into the digital strategy bucket painted with the Marcus brush, which we’ve covered fairly extensively here before. You can see the company’s consumer fintech bundle articulated above as (1) Spend, (2) Borrow, and (3) Save, which further break down into Checking, Credit Cards, Loans, Savings, and Investing. GreenSky is injected as a point-of-sale solution, or some may say BNPL solution, between Spend and Borrow.

There’s of course a lot of interesting coverage of BNPL, including Amazon/Affirm and great strategic insight from Ron Shevlin here in Forbes suggesting a $100 billion Sales volume for 2021 excerpted below. This form of credit is largely preferred by Millennials and Gen Z, and financed by interchange fees rather than underwriting.

Interchange is an economic hack, like payment-for-order-flow in capital markets on retail trading volume. But the more structural and important thing here is the flipping of the Demand model. Rather than expecting a consumer to acquire a credit product from a manufacturer (i.e., a credit card from your bank), the merchant — who is more connected to commerce and intent than your generic debt underwriter — embeds a financial feature into purchasing intent.

The behavioural and emotional labor of credit generation sits with the Demand side, not with the Supply side.

We don’t know if this is how Goldman thinks when acquiring GreenSky, whose 8 million users and $600 million of revenue is a juicy steal for $2.2 billion relative to fintech comps. Back of the envelope math suggests a 3x revenue multiple, rather than a 10-50x nosebleed price. However, these are underwriting revenues related to credit and potential default (looking at you OnDeck), and not recurring SaaS tech. So probably fair pricing all around.

These categories are structurally growing, Goldman needs to lend out its balance sheet, and retail customers have much higher margin than institutional customers. And yet the thing that gets us excited here is the closer connection to real world intent, which means financial firms might become useful yet!

The Integration of Commerce and Finance

We said above that the Internet has come to represent Demand, and that as a result commerce has become digitized into eCommerce. eCommerce is now making a push into financial manufacturing through embedded finance.

But more profoundly, the new Internet of value, Web3, is shaping around that digital demand. Once you start to understand community and intent, and why community-led products outperform top-down designed products, you will also start to understand the chart below from Morgan Stanley.

Want to go deeper? Our value prop is simple: experienced judgment, accurate vision. Get better at Fintech and DeFi with a premium Blueprint subscription. If you knew the shape of the tomorrow, what would you make today?