Fintech Giant Block Under Fire for Fraud Allegations

Short-selling specialist Hindenburg’s research published a negative report on Jack Dorsey’s financial technology company Block Inc (SQ), formerly referred to as Square. The report states that Block, the payment company behind Cash App, has been willing to “facilitate fraud with users and the government, prevent regulation, cover up fees and predatory loans, and deceive investors with inflated metrics.” Share prices of Block dropped as much as 20% in Nasdaq, though SQ had recovered in midday trading. Let us discuss this in more detail below.

All About Hindenburg’s Short Seller Report & Its Claims on Block

 

During its investigation, Hindenburg discovered that previous Block employees estimated that 40-75% of accounts they assessed were fake, associated with fraudulent activities, or had additional accounts linked to a single individual. According to research, Block served as an ideal environment for illicit behaviour by allowing users who had previously been discovered engaging in fraudulent or otherwise unlawful activity to create new accounts.

Up to $892 million, or 35% of Cash App’s total revenue, originates from interchange fees and should be subjected to a regulatory cap. According to the short seller report, Block circumvents this cap in the same way that PayPal does: by channeling earnings through a smaller bank, as claimed by Hindenburg. A former customer care representative showed screenshots showcasing how blacklisted accounts got regularly associated with hundreds of active accounts suspicious of fraud.

Inaccuracies & misleadings

Block issued a press release in response to Hindenburg’s report, in which they stated their intention to investigate legal options against Hindenburg for publishing the factually inaccurate and misleading report. Block stated in a statement that, based on analysis, the whole report is an attempt to mislead and confuse investors. These attacks are classic for Hindenburg, and they’re staged purely to benefit short sellers by driving down the fintech stock price.

Forbes’s advisor was unable to confirm the veracity of these results because neither Block nor PayPal responded to requests. But a senior analyst at D.A. Davidson investment banking firm Chris Brendler thought the results were harmless. Brendler said that most of the stuff wasn’t anything new with regard to valuations. This is a standard tactic in the industry. If Hindenburg is shorting the tech stock, it has a vested incentive to release the most explosive report imaginable.

According to Brendler, Block, the fintech powerhouse, may be fined by the SEC (Securities and Exchange Commission) or the CFPB (Consumer Financial Protection Bureau) for fraud or for evading interchange fee restrictions, but these fines won’t be enough to cripple the company.

Learn How Hindenburg’s Allegations Cause Block’s Shares to Plummet

 

Block stock dropped 20% to $57.31 after the release of the Hindenburg report. The percentage drop was the greatest in the last three years. The stock recovered after the news was out but was seen trading at a significant discount to its five-day moving average later that week.

Block executives cashed out

High Block stock increased by 639% in 18 months during the pandemic. Hindenburg, James McKelvey, and Jack Dorsey claim that it sold nearly $1 billion of stock throughout the pandemic. CFO Amrita Ahuja and Cash App head Brian Grassadonia were among the other execs that liquidated millions of dollars worth of stock. Brendler claims that Dorsey and the other executives’ stock sales during Block’s epidemic boom are perfectly a normal way to sell whenever a stock has a huge run.

Services owned by Block

Block owns five companies specializing in buyer and seller ecosystems. Over the past several years, it has completed several acquisitions to increase its domestic and worldwide position in the fintech trade and cashless payment industries.

  • Stitch Labs, Inc. is a cloud-based stock management marketplace for small and medium-sized brands.
  • Afterpay is a pioneer in the buy now, pay later model.
  • Eloquent Labs is an AI-enabled chat service to aid and replace live-chat customer care agents at e-commerce enterprises.
  • Weebly, Inc. is a web hosting service provider and website-development platform.
  • Verse Technologies, Inc., a Spanish peer-to-peer (P2P) payment platform.

An Overview of Hindenburg’s Explosive Allegations

Hindenburg’s report had a laundry list of financial wrongdoing and unethical behaviour. The investigation asserted that “Block has consistently made use of the demographics that helped them,” calling out Block for its allegedly predatory approach of targeting millennials, Gen Z and minorities with excessive fees and lending rates.

Hindenburg also argued that Cash App has insufficient controls to prevent its “unbanked” customers from engaging in illegal behaviour. Based on interviews with former Block workers, the Hindenburg study reveals that the company’s management repressed internal suspicions about such activities.

Hindenburg exposed Cash App flaws

Hindenburg demonstrated the need for more oversight of Cash App by creating an account and acquiring a debit card in the identity of President Donald Trump. The report estimates that interchange fees account for 35 to 40% of Cash App’s annual revenue (about $892 million).
Interchange fees were transaction costs imposed on businesses whenever a consumer uses a credit or debit card.

According to the Hindenburg study, Cash App knowingly overcomes anti-money-laundering regulations to expand its user base. As per another allegation, Block bypassed profit cap laws on big financial institutions by channeling revenue through a smaller bank. Most of the accounts (40-75%) that former employees assessed were considered fictitious.

Block’s proprietary services

Block’s proprietary services are:

  • The mobile payment firm Cash App, which Hindenburg claims is ripping from Generation Z in order to make money, is at the center of their charges. There were reportedly 70 million subscribers of the service in 2021.
  • Weebly is a website-creation platform just like WordPress or Squarespace. It was formed in 2007, making it one of the more established services of its sort.
  • Square is a financial platform that caters to small and medium-sized enterprises in need of an external service to manage digital payments and receipts.
  • Tidal is a Swedish firm launched in 2014 and is supported by Jay-Z and other celebrities. It is made to provide superior sound quality to its rivals.

Block’s Afterpay sparks debate

Afterpay, an omnipresent buy now, pay later tool that allows customers to extend payments on even little transactions, is one of Block’s most popular offerings. Millennials make up the bulk of the Afterpay user base because that’s who they target.

Afterpay has been criticized for enticing young people into debt cycles to purchase luxury products and for charging steep late fees. Several customers have filed class action lawsuits against Afterpay, claiming the corporation hid the true cost of its service.

As of the year 2019, Afterpay has also been audited by Australian financial regulators due to concerns that it is not in compliance with anti-money laundering legislation. One year later, regulators stated the audit was over, and the corporation had finished the necessary corrections to assure future compliance.

Also Read: From Pioneering Fintech to Scandal: LendingClub’s Rise, Fall & Ascend

Wrap up

The payment processing company behind Cash App, Block Inc (SQ), was recently the target of an alarming study from Hindenburg Research, which claimed the firm facilitated fraud with users and the government, blocked regulation, and misled investors. According to the report, anything from 40-75% of the accounts Cash App examined were either false or fictitious. Block refuted the charges in a news release, which also announced the company’s determination to pursue legal action against Hindenburg. Block’s stock dropped by 20% after the news was released, although it has rebounded.

Global trade leaders is an extensive repository of the world’s most efficient FinTech and trade finance companies. Learn more about global trade finance leaders at https://www.globaltradeleaders.com/.

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