By Patti Murphy
ProScribes Inc.
Block, the company that used to be known as Square, found itself in the hot seat after short seller Hindenburg Research accused the company of being a bastion of criminal activity. Hindenburg also believes the payments company "wildly" overstates genuine user counts while underestimating customer acquisition costs.
What's more, the report, two years in the making, claimed Block "has systematically taken advantage of the demographics it claims to be helping." The only "unbanked" that use Cash App, Block's flagship product, Hindenburg alleges, are criminals, not, as Block claims, small businesses ignored by legacy merchant services providers.
Hindenburg is an investment research firm focused on short selling, which means it speculates on a stock's price declining by borrowing then selling shares of the stock in hopes of purchasing them back at a lower price before the borrowed shares must be returned.
Hindenburg released its report, concluding with a statement that Block was its latest short position on March 23, 2023, and by the end of that trading day, Block's shares had fallen 15 percent. In the past year, Block's share price has fallen by over 40 percent.
The Hindenburg report is detailed, with plenty of supporting evidence—like inter-company emails, screen shots and first-hand accounts—of how Block turns a blind eye to fraudsters. But what really made me sit upright and take notice was this: Block circumvents the Durbin Amendment cap on debit interchange by routing transactions through a bank that is exempt from the cap "and gouging merchants with elevated fees."
"Block includes only a single vague reference in its [regulatory] filings that it earns revenue from interchange fees. It has never revealed the full economics of this category," the report noted. Yet, roughly a third of Cash App revenues come from interchange, Hindenburg said, citing a 2022 Credit Suisse report.
PayPal has disclosed it is under investigation over its similar use of a small bank to avoid debit interchange caps, Hindenburg added.
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 evidence of widespread fraudulent accounts and transactions.
"The acceptance of illegal activity on Cash App, along with lax policies around user account creation, seems to be part of Block's growth strategy," Hindenburg wrote.
One former Square employee told Hindenburg's researchers that "every criminal has a Square Cash App account." There's even a criminal gang named after Cash App. Several members of the gang, based in Baltimore, were arrested in 2021 and charged with distribution of fentanyl and cocaine.
Not surprisingly, Block characterized Hindenburg's report as the inaccurate musings of a short seller. And perhaps it is. But from the vantage of payment processing the cloud now over Block creates new opportunities.
With fees that range from 2.6 percent plus 10 cents (for face-to-face transactions) to 3.5 percent plus 15 cents for keyed-in payments, it's clear Square isn't really cheaper than going the traditional merchant services route.
I've had ISO executives tell me they can underprice Square any day of the week. The problem is that they don't have the national name recognition Square has. Perhaps, but they should have recognition in their local markets. Square also makes it easy to set-up accounts. But as Hindenburg pointed out, that's what attracts fraudsters.
I see a potential public relations nightmare for Square, whether or not the allegations in the Hindenburg report prove true. And I see an opportunity for ISOs and their sales reps to take advantage of this situation.
There are over 33 million small businesses in the United States. Now is the time for ISOs to take a page from Square – simplify the application and onboarding processes and encourage agents to go after those small accounts, not exclusively, perhaps, but with honesty, integrity and the will to help them grow.
It's important to remember that small companies don't always remain small. In fact, some grow to become very large companies. Think Amazon; Ben & Jerry's. Heck, even Hewlett-Packard began as a small company operating out of a rented garage. 
Patti Murphy is senior editor at The Green Sheet and self-described payments maven of the fourth estate. She also co-hosts the Merchant Sales Podcast.
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