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caps, Hindenburg added.
Insider’sreport

on payments Interchange revenue apparently isn't the only thing
Block has been padding. Hindenburg detailed how Block
reported a huge surge in user numbers and revenues
during the Covid-19 pandemic, while ignoring compelling
Block on the hot seat evidence of widespread fraudulent accounts and
transactions.

By Patti Murphy "The acceptance of illegal activity on Cash App, along
ProScribes Inc. with lax policies around user account creation, seems to
be part of Block's growth strategy," Hindenburg wrote.
lock, the company that used to be known as
Square, found itself in the hot seat after short One former Square employee told Hindenburg's
seller Hindenburg Research accused the com- researchers that "every criminal has a Square Cash App
B pany of being a bastion of criminal activity. account." There's even a criminal gang named after Cash
Hindenburg also believes the payments company "wildly" App. Several members of the gang, based in Baltimore,
overstates genuine user counts while underestimating were arrested in 2021 and charged with distribution of
customer acquisition costs. fentanyl and cocaine.

Opportunity knocks
What's more, the report, two years in the making,
claimed Block "has systematically taken advantage of Not surprisingly, Block characterized Hindenburg's report
the demographics it claims to be helping." The only as the inaccurate musings of a short seller. And perhaps it
"unbanked" that use Cash App, Block's flagship product, is. But from the vantage of payment processing the cloud
Hindenburg alleges, are criminals, not, as Block claims, now over Block creates new opportunities.
small businesses ignored by legacy merchant services
providers. With fees that range from 2.6 percent plus 10 cents (for
face-to-face transactions) to 3.5 percent plus 15 cents for
Hindenburg is an investment research firm focused on keyed-in payments, it's clear Square isn't really cheaper
short selling, which means it speculates on a stock's price than going the traditional merchant services route.
declining by borrowing then selling shares of the stock in
hopes of purchasing them back at a lower price before the I've had ISO executives tell me they can underprice Square
borrowed shares must be returned. any day of the week. The problem is that they don't have
the national name recognition Square has. Perhaps, but
Hindenburg released its report, concluding with a they should have recognition in their local markets. Square
statement that Block was its latest short position on March also makes it easy to set-up accounts. But as Hindenburg
23, 2023, and by the end of that trading day, Block's shares pointed out, that's what attracts fraudsters.
had fallen 15 percent. In the past year, Block's share price
has fallen by over 40 percent. I see a potential public relations nightmare for Square,

Padding interchange, ignoring fraudsters whether or not the allegations in the Hindenburg report
prove true. And I see an opportunity for ISOs and their
The Hindenburg report is detailed, with plenty of sales reps to take advantage of this situation.
supporting evidence—like inter-company emails, screen
shots and first-hand accounts—of how Block turns a There are over 33 million small businesses in the United
blind eye to fraudsters. But what really made me sit States. Now is the time for ISOs to take a page from Square
upright and take notice was this: Block circumvents the – simplify the application and onboarding processes and
Durbin Amendment cap on debit interchange by routing encourage agents to go after those small accounts, not
transactions through a bank that is exempt from the cap exclusively, perhaps, but with honesty, integrity and the
"and gouging merchants with elevated fees." will to help them grow.

"Block includes only a single vague reference in its It's important to remember that small companies don't
[regulatory] filings that it earns revenue from interchange always remain small. In fact, some grow to become very
fees. It has never revealed the full economics of this large companies. Think Amazon; Ben & Jerry's. Heck, even
category," the report noted. Yet, roughly a third of Cash Hewlett-Packard began as a small company operating out
App revenues come from interchange, Hindenburg said, of a rented garage.
citing a 2022 Credit Suisse report.
Patti Murphy is senior editor at The Green Sheet and self-described
PayPal has disclosed it is under investigation over its payments maven of the fourth estate. She also co-hosts the Merchant
similar use of a small bank to avoid debit interchange
Sales Podcast.
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