Former Twitter CEO Jack Dorsey-run Block’s shares nosedived on Thursday after short-seller Hindenburg Research revealed that the digital payment company facilitates fraud against consumers and the government, avoids regulation, dresses up predatory loans and fees as a revolutionary technology, and misleads investors with inflated metrics.
Block, formerly known as Square, is a $44 billion market cap company that claims to have developed a “frictionless” and “magical” financial technology with a mission to empower the “unbanked” and the “underbanked”.
“Our 2-year investigation has concluded that Block has systematically taken advantage of the demographics it claims to be helping,” said Hindenburg Research in its report, taking its latest short position on Block.
“We also believe Jack Dorsey has built an empire — and amassed a $5 billion personal fortune — professing to care deeply about the demographics he is taking advantage of,” it added.
Most analysts were excited about the post-pandemic surge of Block’s Cash App platform, with expectations that its 51 million monthly transacting active users and low customer acquisition costs will drive high margin growth and serve as a future platform to offer new products.
“Our research indicates, however, that Block has wildly overstated its genuine user counts and has understated its customer acquisition costs,” the report alleged.
Former employees estimated that 40-75 per cent of accounts they reviewed were fake, involved in fraud, or were additional accounts tied to a single individual, it claimed.
Block or Dorsey were yet to reach to the Hindenburg report.
Block embraced one traditionally very “underbanked” segment of the population: criminals.
“The company’s ‘Wild West’ approach to compliance made it easy for bad actors to mass-create accounts for identity fraud and other scams, then extract stolen funds quickly,” the report mentioned.
Even when users were caught engaging in fraud or other prohibited activity, Block blacklisted the account without banning the user.
A former customer service representative shared screenshots showing how blacklisted accounts were regularly associated with dozens or hundreds of other active accounts suspected of fraud.
This phenomenon of allowing blacklisted users was so common that rappers bragged about it in hip hop songs.
CEO Dorsey has publicly touted how Cash App is mentioned in hundreds of hip hop songs as evidence of its mainstream appeal.
“A review of those songs show that the artists are not generally rapping about Cash App’s smooth user interface — many describe using it to scam, traffic drugs or even pay for murder,” the report alleged.
Cash App was also cited “by far” as the top app used in reported US sex trafficking, according to a leading non-profit organisation.
Multiple Department of Justice complaints outline how Cash App has been used to facilitate sex trafficking, including sex trafficking of minors.
Beyond facilitating payments for criminal activity, the platform has been overrun with scam accounts and fake users, according to numerous interviews with former employees, according to the report.
Block’s $29 billion deal to acquire abuy now pay later’ (BNPL) service Afterpay closed in January 2022.
“The acquisition is flopping. In 2022, the year Afterpay was acquired, it lost $357 million, accelerating from 2021 losses of $184 million,” the report mentioned.
In sum, “we think Block has misled investors on key metrics, and embraced predatory offerings and compliance worst-practices in order to fuel growth and profit from facilitation of fraud against consumers and the government,” said Hindenburg.
