Why use SWIFT alternatives (when you’re not a criminal)?

At a certain scale, companies with enough time and money, tend to strive towards vertical integration. Integrating vertically, controlling a larger part of your value chain, means 1) lower unit costs to produce your goods, 2) better efficiencies along your supply chain, and 3) a better hand on potential disruptions across the chain as they arise. Vertical integration isn’t without its disadvantages, but done right, the upside is usually worth the risk.

This ambition applies not only to goods manufacturers, but service businesses too. The finance industry, in particular, is especially fond of this business, both at the customer-facing level, and the infrastructure level (central banks, clearing houses, etc.).

Just as in manufacturing, if you’re a large bank handling millions of international transactions each week, there’s obvious appeal in wanting to control the rails on which that money moves — or at least making sure your home country’s government does.

When that infrastructure plays a critical role in ensuring stable, reliable trade relations between two countries, it’s probably not that surprising that each of those countries would rather they were the ones who controlled it. Obviously, this isn’t practical — each country can’t really mandate that their trade partners only use their system when trading with them, so a compromise is needed.

Enter SWIFT: The Society for Worldwide Interbank Financial Telecommunication. SWIFT is a service (technically a “cooperative society“) created to serve as a central system by which banks can coordinate international money movements. To avoid the whole issue of a single country controlling this international system, the cooperative is chaired by banking representatives from all over the world. It’s important to note that SWIFT doesn’t actually enable the transfer of funds itself, rather it’s a protocol, a digital messaging language, with which financial institutions coordinate operations of international wire transfers. Banks then operate their internal books based on the messages exchanged over this system.

As a platform for interconnection, SWIFT is a network, and just like any network, its value increases with each incremental new transaction made over it, and each new member that joins it.

Power compounds, and SWIFT has become the de-facto international payment rails for almost all banks across the world.

SWIFT isn’t alone, though. Alternatives exist and have been growing in usage for years.

As Russian banks have found themselves subject to economic sanctions by the US and EU over the war in Ukraine, otherwise boring financial infrastructure suddenly became a mainstream topic of discussion.

Media outlets are often quick to point out that even as many Russian banks find themselves ‘kicked off’ the SWIFT network, they have alternatives that they could turn to to get around Western sanctions. But these alternatives are almost exclusively framed as fallback options — their only role being to let bad actors keep transacting smoothly when the US and EU have turned against them.

To be sure, this is a key feature of these networks. But this framing ignores the thousands of banks already using these alternative networks (usually in addition to their SWIFT-based operations), without the imperative caused by sanctions.

And that’s what I want to explore. When there’s a clear, most effective leader, what are the incentives for a given nation or bank to use a SWIFT alternative? If the best network is the one with the most members, why use anything else?

To answer this, first some quick context.

SWIFT isn’t alone

The presence of an entrenched leader doesn’t mean other nations have given up on building competing networks. Though SWIFT is, on paper, an internationally-controlled cooperative, it still has to be domiciled somewhere — in this case, Belgium. This means SWIFT is subject to Belgian law, which itself remains subject to EU-wide law, which through political and economic integration is influenced by American policy directives.

Through this lens, it’s not surprising that the two nations investing most heavily in SWIFT alternatives are those least inclined to freely comply with Western (read: American) financial influence: China with their CIPS network, and Russia’s SPFS. Quick note: there are more alternatives than just these two — India has created homegrown solutions, and even the EU briefly got in on the fun with INSTEX. We’ll focus mostly on China and Russia.

As the dollar’s dominance in international trade (almost 50% of SWIFT transactions) is increasingly used as leverage against adversaries, and as the US and EU take a growing liking to financial sanctions as a foreign policy tool, the value of a non-US dominated payment solution becomes clear.

(Source: The Global Sanctions Database)

Right now, China’s CIPS (Cross-Border Interbank Payment System) is the largest challenger to SWIFT, though it handles just a small fraction of transactions comparatively. (Technically, much of the CIPS network is built on SWIFT, but that’s a whole different article). It claims to have around 1,300 participants total, with over half of those based in China, the rest spread over 100+ countries. Along with offering new efficiencies for Asian markets, China is looking at CIPS as a way of serving their long-term goal of challenging the dollar as the world’s trade and reserve currency, by internationalizing their Renminbi. Alongside CIPS comes Russia’s SPFS (System for Transfer of Financial Messages), though it’s an even smaller player, with its roughly 400 members largely constrained to Russia and China.

For institutions that have long used SWIFT as their messaging platform, the switching costs to begin using a competing platform are high. SWIFT’s default position over the years has generated massive operational knowledge in the industry. When your bank is hiring for operations managers, AML teams, or banking tech roles, it’s almost certain any potential candidates have years of experience with the SWIFT protocol, and relatively little with anything else. Using a competing network alongside your SWIFT operations requires new training for internal teams, and opens up a new world of compliance and regulatory risk across international jurisdictions.

With this in mind, let’s get back to the initial question, what incentives drive adoption of these other networks?

Benefits of alternatives

Let’s cover the most obvious answer first: alternative solutions offer a way to avoid US/EU sanctions.

SWIFT is technically a neutral entity, but as mentioned above, that neutrality is limited by regional laws. Some examples are the case of Iran in 2012 — to comply with EU instructions, SWIFT disconnected all Iranian financial institutions from the network. A more recent example: the disconnecting of a handful of Russian banks from the network, again under pressure from the EU. If you’re particularly interested in buying Iranian oil, for example, the benefits of SWIFT alternatives are clear.

Of course, only in very rare cases has SWIFT been ordered to cut off sanctioned states from the network entirely. Plenty of nations live under Western sanctions (financial or otherwise) day-to-day and are still able to transact over SWIFT — it just usually means having to use the currency of a country that is happy to look the other way, or actively doesn’t adhere to Western sanction lists.

Still, in most cases, just not using the dollar or Euro isn’t a realistic solution, as the US and EU would still object to your transacting with the sanctioned country, threatening your friendly relations together. In this case, the privacy from Western eyes that a non-SWIFT solution offers is an attractive proposition.

With the obvious answer out of the way, let’s look at the more technical and pragmatic reasons a trade partner might lean toward a different network.


Fees are a big factor in the decision. Imagine this (very simplified) scenario:

You’re a small Brazilian bank and a client of yours needs to pay their Chinese supplier for a recent shipment of goods.

Your client, being a Brazilian business, ideally wants to pay with their Brazilian Real, but their Chinese supplier doesn’t import anything from Brazil, so that Real doesn’t do them much good. They want to be paid in Renminbi.

Being that you’re a pretty small institution, and you don’t often have to send any meaningful amount of money to China, you don’t bother keeping large reserves of Renminbi on hand, and you don’t have an account at a Chinese bank for the same reason. This means you have to find someone that does, and get them to pay the Chinese supplier.

This isn’t always easy — it means you’re looking for someone that wants to take your Real and also happens to have plenty of Renminbi on hand.

Being a small bank, your list of large institutional contacts who are likely to have deep accounts in both currencies isn’t too long. Instead, you’ll have to find multiple partners who can each handle a different step of the transaction.

You’re friendly with a US-based bank that happens to have good relations with a fair few Brazilian companies. They’ll happily take your Real, but they don’t have Renminbi on hand. So what they propose is to take your Real, and send the equivalent amount in dollars to a different American bank, which has deep pockets in both US dollars and Renminbi. That American bank will take those dollars, and send the equivalent Renminbi amount to the Chinese bank account of your client’s Chinese supplier.

Your client is happy: they’ve paid their bill in Real; their Chinese supplier is happy: they’ve been paid in Renminbi, and the two American middlemen are particularly happy — they just changed some numbers on their books and pocketed a fee for it.

This method works. It’s time-tested but expensive. And it’s exactly the sort of process that China is looking to replace with CIPS. To quote Chaoyang Zhang, an executive at Bank of China: “Opening an account in CIPS is somewhat equivalent to opening an account in China’s central bank.”

It would allow you, the small Brazilian bank, to have direct access to Renminbi reserves in China, without having to jump through the regulatory hurdles involved in opening the required accounts to hold RMB, or opening a dedicated bank account in China. Most importantly, it allows you to avoid paying fees to both those American banks along the way. This means lower fees for your clients and a better reputation among Brazilian businesses looking to trade with China.


Those American banks, known as Correspondent Banks, on top of taking their fee, also take their time in processing your transaction.

In an international transfer with SWIFT, each member in the chain has to verify the transaction’s validity and legality to be compliant with their jurisdiction’s KYC/KYB (Know Your Customer/Know Your Business) rules and local anti-money laundering compliance regulations. Though SWIFT itself doesn’t move the money, when they get the order via the network, they have to carry out the required checks before accepting the payment and continuing the next step of the transaction laid out in the message.

In the previous example, crossing through various third parties, these added checks can add multiple days to the total transaction time, which both the sender and (especially) receiver would rather do without.

On top of the added time and money taken in using correspondent banks, each additional link in the chain adds extra complexity to the transaction, particularly in the case of error. When something goes wrong, it’s much harder to identify who to contact and what to do when you don’t know “where” that wire transfer is (and each bank along the chain isn’t in a rush to take the blame).

For our small Brazilian bank, a direct contact in China via CIPS would save a whole lot of headache when things go wrong.

Counterparty risk

And things do go wrong. Day-to-day, most of the difficulty of working with correspondent banks comes from transactions being made more complicated along the chain, creating opportunities for error. But there’s a different type of risk present in having to go through middlemen to carry out a transfer — one that doesn’t appear as much of an issue until it very suddenly does: counterparty & liquidity risk.

In those rare, black-swan events, liquidity runs on correspondent banks are an issue that direct network integration largely mitigates. When your partner banks’ currency reserves suddenly deplete and borrowing costs skyrocket (almost overnight, in Russia’s recent case), quasi-direct access to that given currency’s central emitting bank is suddenly a much-appreciated perk.

SWIFT and CIPS are still only messaging networks, but the difference comes from CIPS being integrated more deeply into China’s financial system. In CIPS, the disconnect between the message and the transaction isn’t as pronounced — both are ultimately under the control of the same entity.

To return to that quote from the exec at the Bank of China, having a “[somewhat equivalent] account in China’s central bank” can help ensure stable operation of cross-border payments, compared to what would otherwise have been a multi-step, multi-nation transaction over the SWIFT network. (Though I’ll note that of CIPS’ 1300+ participants, less than 80 are “direct” members with accounts at the PBOC — all other members route their transactions through these direct members. While this does begin to resemble a correspondent banking structure, the difference is that most of these indirect members are in China already, and hold large RMB reserves, so the counterparty risk isn’t comparable.)

Local networks are local-friendly

I’ll wrap up with a final, and perhaps most significant, reason for which entities might choose to use a non-SWIFT messaging network: local networks are local-friendly. Let’s keep using the case of CIPS to illustrate.

This doesn’t apply in all cases but is largely applicable in the case of Russia and its close trade partners, and China and its neighbors: countries in close proximity to each other are more likely to have larger trade volumes between them.

This means there’s a good chance they hold more of each other’s currencies in reserves, making correspondent banks and central clearing authorities mostly redundant in carrying out trade and payments. They have aligned incentives to use common, local, payment rails. Through this lens, China’s geographically-closest trade partners should understandably be those who stand to most benefit from circumventing the SWIFT system. They already hold each other’s currencies, and mostly route payments directly through nearby Asian financial institutions, so why not opt for the benefits of deeper technical integration? 

There’s an added efficiency here, too. In our very-online corner of the internet, it’s easy to forget just how important a role these messaging networks play in the context of physical trade.

Imagine you run a rubber-exporting company in Thailand, namely to your biggest rubber trading partner, China.

That rubber is crossing a not-digital ocean on a not-digital ship. If something goes wrong with payment, both parties would much rather be dealing with someone in the same timezone who can help solve the issue quickly. When things go very wrong, they don’t want to be hunting for a Brussels-based lawyer to bring SWIFT into the mix. Time zones, language, and local understandings still matter very much for real-world trade.

SWIFT (and by association, US & EU) dominance isn’t being replaced anytime soon, but there are clear reasons to use these first non-US-dominated alternatives if you’re a close trading partner with the country offering a tailor-made system.

CIPS, for the right customers, offers cost reduction, increased efficiency, privacy from the domineering US banking system and dollar supremacy, all while lowering risk for the average business, bank, or nation conducting the bulk of their operations in the same region as their customers.

Russia’s system cannot be expected to see breakout success anytime soon, and I’d argue the recent financial sanctions imposed on the country’s top banks have done far more harm to the SPFS project than they have good, but China is making strong steps toward creating a real SWIFT challenger.

The US has enjoyed its power over the global financial network for decades thanks to the dollar’s supremacy granting leverage over SWIFT. Its omnipresence supported by accrued industry knowledge and high switching costs will keep SWIFT cemented as the leading player in the near future on the global stage, if only by reticence toward being a first-mover in questioning the West’s go-to system.

But with each new financial sanction the West imposes on adversarial nations and banks, the rationale grows for at least exploring options to ensure future resilience by integrating fallback networks.

It’s not going anywhere quite yet, but starting with intra-regional trade, it’s beginning to look like the days of SWIFT being the only realistic option are behind us.

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ByteDance and a Theory of Attention

There are two main avenues that consumer tech companies and social platforms can take to monetize their products.

The first one: monetize on owned property. At a high level, this means tying revenue directly to users’ usage of your service. This looks like anything from selling ad space, to proposing paid subscriptions, taking transaction fees, offering in-app premium feature upgrades, etc. Most often, products monetize through a mix of these different methods.

This is the model of most social networks, apps, consumer web services, etc.

The second: monetize the underlying infrastructure. Infrastructure, here, broadly meaning the components that form the required backbone of the consumer-facing product. This means turning parts of your business that were historically cost centers (custom-made software tools, data center builds, etc.) into revenue drivers. Although the infrastructure was originally made to serve the product in some form, many companies have been able to spin out new B2B offerings based on processes, tools, and IP that was originally created for internal use only.

Some examples of this are well known: what became AWS started as an internal project around 2000 (!) as a way to solidify Amazon’s web infrastructure, which was struggling to handle the company’s hypergrowth at the time.

The first version of the Unreal Engine, the game physics engine which today underpins countless AAA video game titles was originally developed to be used as the engine for the 1998 game Unreal.

More recently, Snap Inc. has been following a similar strategy with their suite of camera tools and augmented reality technology originally built for Snapchat’s Lens features. Launched in 2018, Snap Kit offers a set of developer tools that let you integrate various parts of the Snapchat toolset into your own products. The Camera and Story kits in particular are prime examples of this infrastructure strategy. Rather than spending months trying to build an AR lens feature into your own app from scratch, save time and a pile of money by just integrating Snap’s Camera directly, and building on the shoulders of their existing ecosystem.

From planning to execution

Turning these cost centers into revenue drivers obviously sounds like a sound plan on the surface. But in practice, executing such a strategy essentially means launching an entirely new business unit. Building a product for internal use is one thing, but selling it and making a sustainable revenue stream from it represents a mammoth task that can pose a real threat of distracting management from the core business.

With that in mind — knowing that it can be resource-intensive and a heavy strategic move — it’s worth exploring some of the key factors that tend to push companies in the direction of growing their B2B offering alongside their core B2C business.

The first and most obvious reason is diversification and handling of a transition to maturity. Particularly for consumer social companies whose user revenue over a given period can be subject to significant variance and are tricky to forecast, locking in fixed-term large ticket contracts in an adjacent field offers partial insurance against a downturn in the core business’ metrics. Similarly, large social network companies often face the challenge of managing the transition/expansion to a new stage in the company’s lifecycle as user growth begins to slow down.

Opening new streams of revenue focused on high-value contracts with comparatively little extra R&D required represents an attractive line item to investors and can be pointed to by management as a new source of growth opportunity when the core B2C business starts showing signs of reaching the upper end of its S-curve.

As it turns out, Snapchat serves as the perfect illustration of a situation where a slowdown on the horizon prompted revenue stream diversification.

In a turn of perfect (?) timing, Snap announced the launch of Snap Kit in mid-June 2018, the first quarter in Snap’s reported history in which daily active user numbers dropped quarter-on-quarter. The launch came as part of a two-pronged strategy to expand the Snap ecosystem outside of the app — it was around this time that Snap fleshed out their content-first strategy in a heavy push to grow advertising revenue.

Bringing Snap Kit to developers to build on the Snap ‘infrastructure’ for their own projects is a perfect example of the second avenue of monetization.

Allowing 3rd party clients to build on top of your existing technology also offers a cheap and attractive source of data to fuel your own R&D efforts (licensing agreements allowing). Through this lens, expanding into a B2B offer, beyond serving as a diversified revenue stream, acts as a long-term investment to bolster your own tech innovation — and you can actually charge for it.

On an even longer time frame, this facilitates expansion into new verticals or into capturing new target markets and use cases in your existing verticals.

Here we come back around to turning cost centers into revenue drivers. This newly generated revenue effectively compounds, as each new client’s unique application of your owned IP brings with it new information and insights augmenting your own understanding of the range of possibilities it enables.

Licensing access to the fruits of your proprietary knowledge serves as a short-term, low-added-cost revenue driver, and an opening for long-term compounding growth opportunities.

And that brings us to our subject of the day.

Introducing BytePlus

Last week, ByteDance, the tech company behind TikTok, launched a new B2B service offering in the West under a new business unit known as BytePlus.

BytePlus’ core offering covers 4 main pillars: 

  • BytePlus Effects: the technological tools used in TikTok’s (and, originally Douyin’s) live camera effects and AR engine
  • BytePlus Translate: similar to, well… Google Translate — offering text, voice, and image translation, and the AI/ML backbone that powers it
  • DataRangers: a suite of different tools to gather, manage, and manipulate data at scale
  • BytePlus Recommend: the “best-in-class recommendation algorithm” most famously known for driving TikTok’s hypergrowth

I’ll add: BytePlus’ concept isn’t an entirely brand new thing — ByteDance recently first launched these offers in the Chinese B2B scene under a new brand known as Volcengine.

Very similar to Snap, BytePlus brings gesture detection SDKs, body motion SDKs, beauty kit tool suites, and more to 3rd party developers to develop their own external IP. But where Snap has focused more heavily on its advertising and content strategy (which, it’s still worth noting, ByteDance has been working on too), BytePlus represents ByteDance’s decision to prioritize building a larger tech infrastructure ecosystem and extracting the most value possible from their crown jewel — their recommendations engine.

The famed recommendation engine, initially born as a news article recommendation tool for Taotiao, looked like it would be kept under the exclusive usage of ByteDance through the last couple of years — even as countries tried to force ByteDance’s hand into technology transfer agreements through 2020.

What factors, then, drove the recent decision to license access to this famed, historically secretive and exclusive IP? Why now?

The answer, I believe, brings up some of the points we explored above.

Revenue from TikTok (and Douyin — the Chinese version of TikTok) is believed to represent only a small part of ByteDance’s overall (rapidly growing) income, despite being the company’s most successful product by user numbers. Though having grown its advertising tools over the last year or so, alongside new features such as livestream donations, games, and e-commerce integrations, monetization avenues within TikTok have been relatively limited.

BytePlus, then, serves as a way by which to monetize the core value driver underlying TikTok, rather than risk alienating users by attempting to maximize revenue growth within the app itself.

Just as we explored above, layering a B2B offering on top of a B2C data collector acts as an attractive proposition to pitch long-term growth opportunities.

Furthermore, digging into the terms of service associated with BytePlus’ various infrastructure tools, it’s quickly apparent that they’ve been careful to maximize the compounding returns of licensing their sandboxed technology to outside clients.

BytePlus has been careful to ensure that all IP rights to software, data models, algorithms — basically all technical developments — built by clients on or around BytePlus’ underlying technology belong to BytePlus.

In fact, they went as far as to cast a broad net of ownership over “any intangible ideas, residual knowledge, concepts, know-how and techniques related to or learned from BytePlus’s provision of the Platform or Services”. This terminology is purposely vague, but associated with the company’s claim over clients’ “operational and technical data relating to the Platform and Services” paints a picture in which BytePlus is perfectly positioned to benefit from the compounding technical knowledge generated by having clients using its technology in new verticals and use cases.

The technical data derived from new implementations of BytePlus’ software models acts as fuel for BytePlus’ continued innovations and offers feelers into potential new markets to whom the company will later be able to address new products and services more directly.

Meanwhile, the (aggregated, anonymized) user data generated by client applications serves to further improve the recommendation algorithms and AI models that underpin the company’s infrastructure offers. As Byrne Hobart points out, ByteDance’s customization and recommendation algorithms can be applied in a content-agnostic way: “picking up a critical mass of useful signals is more important than knowing exactly what those signals are.”

Through sufficiently structured and defined taxonomies associated with the underlying content, in a broad sense, ByteDance doesn’t need to know exactly what type of content interests what type of person. This is the exact theory that allows ByteDance to offer its algorithms to other companies, ones that don’t need a short video recommendation tool.

A Theory of Attention

At a certain level of abstraction from the content itself, an AI/algorithm effective enough at pattern-matching user behavior can be used across a wide variety of use-cases almost unrecognizable from the original format for which the algorithms were developed.

In essence, the launch of BytePlus serves as a major step towards building ByteDance’s generalized “Theory of Attention”.

Most recommendation engines (take social network timeline algorithms, for example) essentially have to progressively feed an AI model for understanding what type of user is interested in what flavor of content. In most cases, this model is limited to one format of content. Twitter is pretty good at knowing what type of tweet I will want to see, and YouTube is great at knowing what type of video I want to see. Neither would (at least initially) be very good at doing the other one’s job.

And that’s exactly where ByteDance is looking to come in.

Rather than build new individual models for understanding what catches my attention on one site, what catches it on another, and so on, ByteDance wants to build an abstraction layer to package together all different signal sources to understand what underlying factors tend to lead to catching my attention at all.

By extending feelers into new verticals and use cases, ByteDance is aggregating a critical mass of signals to understand the factors that grab attention in all different types of contexts and situations.

In this sense, BytePlus’ recommendation algorithm service starts to bear resemblance to content discovery and native advertising companies like Taboola or Outbrain. Their models aren’t dependent on having access to a large abundance of a specific type of content, as long as a sufficiently wide variety of content exists for their algorithms to parse and display to the users.

For ByteDance, augmenting this Theory of Attention opens new opportunities for further optimizing their existing product line to increase revenue generated per user, and acts as R&D data to generate new products and services, which themselves feed back into this aggregated data.

To use tech Twitter lingo: they’re building a flywheel!

A last key point of interest in this move by BytePlus is what it symbolizes for ByteDance’s global expansion efforts.

As of mid-2021, TikTok remains banned in a handful of countries, most notably India. Under the pretense of national security, and as a response to the China-India border clash in 2020, TikTok has been entirely shut out of the Indian market for over a year. India, at the time, accounted for 1/3rd of all TikTok installs.

BytePlus faces no such restrictions. India’s ban targets TikTok (and several other Chinese apps), but no other ByteDance properties. As such, BytePlus serves as a new point of entry into the Indian market, opening it to a population of 1.3B Indians able to generate the valuable behavioral signals which fuel ByteDance’s technology. In fact, the company has already been forging some early partnerships with Indian firms, touting Indian clients such as Gamesapp on its site.

The initial criticisms various governments had around TikTok largely focused on its recommendation engine, and the extensive personal information it collects from users in order to power it. It’ll be interesting to watch how governments react in the long run to this almost identical technology being rolled out into their countries, perfectly legally circumventing bans and restrictions.

My (likely not that bold) prediction: nothing will happen.

TikTok’s recommendation algorithms and the data they collect served as a very public target throughout countries’ geopolitical spats with China. By virtue of its hypergrowth and ubiquity among younger generations, particularly in India, TikTok served as an easy boogeyman to attack.

Despite being the same technology as the one they previously criticized, governments won’t react to this expansion. The technology is less visibly prominent than it is with TikTok, and its extracted value much more nebulous. It’s much easier to rally political outcry against a prominent consumer-facing product than it is to criticize a single layer in a tech stack.

I’ll be closely following BytePlus’ next moves and new clients. Their clients so far are spread across several verticals — many, brand new sectors for ByteDance — including US fashion & e-commerce (Goat) or travel booking (Wego).

ByteDance was the first Chinese company to seriously challenge the existing tech giants in the social space. Now they’re setting their sights on their B2B offers. BytePlus marks the first large-scale data company out of China to cross borders and challenge (much larger) entrenched players like Azure, Google Cloud, and AWS.

And thanks to their famed crown jewel, it looks like they might just stand a chance.

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Square Makes Tidal Waves

Every now and then, a company does something that makes people just sort of go “…huh…why?”.

This last week was one of those times. 

Sure enough, last week, Square (the fintech company that created Cash App and shares a CEO with Twitter — Jack Dorsey) announced that they were buying “a majority ownership stake” in the music streaming service Tidal, led by Jay-Z. 

Not too surprisingly, this announcement was widely met with that “…huh…why?” reaction. A financial technology company buying a hip-hop-led music streaming service? What’s to be gained there?

The answer, interestingly, is: quite a lot!

Some M&A deals are strange because the two companies’ business models appear entirely opposed. Amazon buying Whole Foods in 2017 was a pretty unexpected move and appeared, on the surface, a strange one; while working hard to drive the shift to online commerce, why would you suddenly spend almost $14B to acquire a massive retail footprint across the United States? It quickly began to make more and more sense, as Amazon made further pushes into physical retail through Amazon Go and started building out their online grocery shopping service, Amazon Fresh. What seemed like a step backward initially proved to be a strategic long-term move.

Other M&A deals seem strange not because the two companies’ models are so opposed, but because they’re so (seemingly) unrelated. These are the more fun ones to figure out, and happens to be the type of deal we’re looking at today.

The best part about these deals is that they offer a great opportunity to dig into trends that might otherwise go unnoticed if you’re not paying particular attention.

So, let’s dig into it: why would a financial technology company want to spend almost $300M to own a relatively small music streaming service in a space dominated by entrenched giants?

Well, there might be a few reasons…

Hip-hop’s love for Cash App

To lay out the context, Square has had close ties with the music industry for a little while.

Square’s consumer mobile payment product, Cash App, in the last few years, has been met with much love by the music industry, and more specifically the hip-hop industry.

Though not explicitly marketed to artists and the music industry, Cash App has seen massive word-of-mouth growth through artists doing cash giveaways contests to their fans through the app. Quickly, as the trend grew among artists to engage their audiences with these sorts of giveaways, the brand gained attention in hip-hop culture in particular.

For a more detailed write-up of Cash App’s success in the hip-hop space, you can have a read of Dan Runcie’s brilliant piece at Trapital

Square itself isn’t even too sure what initially sparked such interest in Cash App in the music scene. Here’s CEO Jack Dorsey in a 2019 investor conference: 

“This is also something we weren’t expecting, but I think Cash App has touched in the culture. We’ve just benefited from people loving it and wanting to sing about it, and putting it in their music videos, and it’s amazing how much that spreads.”

As their traction in the space grew, Square (Cash App) was quick to lock in the interest, partnering up with massive artists to do virtual cash giveaways and get the Cash App brand front and center.

Fast forward to today, and Square’s purchase of a music streaming platform led by a huge hip-hop and rap figure begins to seem a little less random, although this is just the start to painting the full picture.

Considering Cash App’s massive brand presence in the industry, acquiring more significant inroads into the space lets Square start to take more control of the transactions that happen on and around its payments platform. This begins with Cash App, but goes much further. 

It’s worth noting that in early 2020, Spotify introduced the ability to directly donate money to artists through PayPal and Cash App. When the acquisition settles, it’ll be interesting to see whether Square revokes this access in favour of offering it only via Tidal, or would prefer to take their rake of all transactions regardless of platform, and leave the feature (assuming Spotify doesn’t prefer to remove the Cash App option themselves).

Spotify questions aside, the Tidal acquisition signals a strategy in two parts.

  • On one side, Square is taking a more active role in the transactions that happen between artists and fans in the music world — this through Cash App.
  • On the other side, Square is positioning itself perfectly to offer more complex financial services to the artist side of the industry, through point of sale transactions, subscription services, and much more.

Square, artists’ new best friend

To understand how Square is looking to integrate itself across multiple layers of the artist-audience stack, it’s worth quickly laying out how Square segments its core “Square/Seller” business, and Cash App. We’ll mostly be focusing on the Seller business in this piece, but the difference is important.

This graphic from their most recent 10-K saves me some work…

To give a rough rundown of the differences: Square itself primarily focuses on SMB clients (retail stores, restaurants, hair salons, etc.). It offers a full range suite of services starting with point of sale tools (wireless digital card readers, order-placing interfaces, etc.) and spanning the gamut of payment and payroll management systems, team management systems, banking services, and plenty more.

Cash App, on the other hand, is primarily consumer-focused. It began by offering a way to quickly send and receive money simply through the app, no bank account required. Today it’s expanded its services to include direct deposit banking, stock and crypto trading features, and a Visa-issued debit card.

Square’s mission, from its outset, was to provide new tools to help companies better run their business and help them secure new income formats. When they launched in early 2009, this took the form of simplifying the process for small businesses to accept debit and credit cards by leveraging new technologies of the time.

Over the last 12 years, the company’s mission has stayed the same: to provide tools to help owners better found and run their businesses. Today, that takes the form of a wide range of tools and technologies that centralise and answer all the financial needs a business can have to run its operations. Quoting from the 10-K (emphasis mine):

Square offers a cohesive commerce ecosystem that helps our sellers start, run, and grow their businesses. We combine software, hardware, and financial services to create products and services that are cohesive, fast, self-serve, and elegant. These attributes differentiate Square in a fragmented industry that traditionally forces sellers to stitch together products and services from multiple vendors, and more often than not, rely on inefficient non-digital processes and tools. Our ability to add new sellers efficiently, help them grow their business, and cross-sell products and services has historically led to continued and sustained long-term growth.

I quote from the filing at length because it’s so relevant to the recent acquisition.

In just a single paragraph, Square has laid out the entire root of its strategy as it looks to get a foothold in the music space. Though the “fragmented industry” they talk of in this passage refers to traditional small businesses, the principle is the same. 

For creators, creation is no longer the most challenging part of the process, distribution, and — crucially — monetisation are. Artists today have to work hard to produce good content, absolutely hustle for distribution (to the point that “Check out my SoundCloud” has become the de-facto follow-up under any successful Tweet), and someday, somehow, hope to make some actual money off their craft, beyond the few cents per thousand plays that Spotify offers.

The last decade has made the ability to record, produce and release new music fantastically accessible to all, but artists have never made less per listen of their songs than today. 

The key monetisation routes for artists looking to grow a small fanbase, or begin to earn money from a larger one, are typically through merch sales, album or (occasionally) vinyl sales, a negligible bit of streaming revenue, and ticket sales. The first and last ones of these have been, well… killed over the last year. As chance would have it, these two also tend to be by far the most profitable.

It’s right about here that the needs of creators intersect quite perfectly with the offerings that Square and Cash App propose. Sure enough, this has been the public line that Jack Dorsey shared on Twitter.

Square has sought to empower businesses with new tools to facilitate making money, and Tidal long has too, by creating a platform that sells itself as being more “by artists, for artists” than the more corporate and inaccessible Spotify or Apple Music.

With this new opportunity, Square is in a perfect place to provide the backbone for the quest to help artists gain income from their work. Tidal is the entry key for Square to be the middle-man facilitating the artist-fan transactional relationship. This acquisition is not really about Square gaining a foothold in the streaming space, it’s a move to empower the individual artist. 

This was clear as day in a Billboard interview with the incoming interim head of Tidal, Jesse Dorogusker, stating (emphasis mine):

“We think the streaming service is an important part of it, and it is growing and will continue to grow, but we’re especially interested in creating new adjacent opportunities in service of the whole artist experience and their experience with their fans in addition to the streaming service.

The possibilities for monetisation streams that a Square x Tidal duo can offer creators are endless.

Picture in-app integrated product and merch lines that can be ordered in just a couple taps (through Square/Cash App of course), exclusive content drops, early access to new releases, private livestreams and concerts, all hosted under a Square-owned property. Giving creators such avenues is the exact way forward to empower them, as the company’s mission statement lays out.

It’s not to say these services don’t already all exist individually. Teespring has been a go-to in the creator space for years; private access to content through Patreon and Bandcamp has been a staple of online creator relations for a while now. What Square changes here is unification. Bandcamp can come close, offering private releases, merch fulfillment and more, but they don’t control the streaming experience — the entry point of the artist-fan relationship.

Tidal and Square do.

Escaping the ticket cartel grip

In fact, Tidal wasn’t slow to spot the opportunity to control a deeper (read: more $$$) relationship beyond streaming. Very quickly after launch, Tidal announced TIDAL X:

TIDAL X is a program that connects artists directly with fans by giving them a platform to engage with them in unique ways, including one-of-a-kind live shows, events, artist meet & greets, and concert tickets for TIDAL members to enjoy.

Through Tidal X, artists can already offer exclusive content to paying audience segments, and through close ties with top artists, Tidal has gone a step further.

What no other platform (Bandcamp, Patreon, Spotify, etc.) has been able to do at scale is bridge the gap between small exclusive releases and real-life, physical experiences. Tidal has been the first to put this in place at scale, providing exclusive access to select listeners to tickets to concerts and listening parties, for artists like Kanye West, Jay-Z, Beyonce, and plenty more.

What’s interesting about this isn’t that a billionaire hip-hop star was able to offer free tickets to his own concerts or those of his wife and friends, but that it’s one of the rare opportunities for concert-holders to go direct to consumers, completely circumventing the shady and seemingly inescapable grip of the ticket sale/resale cartels.

Just a handful of ticket resale companies are responsible for almost 100% of online ticket sales to sport events, concerts, festivals, etc. A report from Grand View Research estimates the online event ticketing market to reach $68B by 2025 — almost entirely driven by resale companies like TicketMaster, StubHub, or SeatGeek.

If you’ve ever tried to buy a ticket to almost anything online, you’ll not be surprised that these platforms are little liked by almost anyone — fans or artists. Performers struggle to circumvent the stranglehold these companies have on the ticketing market, fueled by instant-purchase bots designed to resell tickets at a significant markup. Meanwhile, event-goers have to pay a multiple of the original ticket price for the same thing.

Square and Tidal are in a position to build off their subscription model to build out a true artist-first method of selling tickets to fans.

By offering exclusive early access to upcoming concert tickets only to paying Tidal subscribers, Tidal and Square can offer a best-in-class artist and consumer experience for artists’ most dedicated fans, while circumventing the bot resale market, as ticket purchases would be linked with personal information through their billing information in existing accounts.

Square’s customer relationship management suite is perfectly positioned to combine with Tidal’s existing platform to build exclusive fan-artist relationships, all while now tapping into more personal user data thanks to transactions through Tidal.

For Square, the benefits are obvious.

  • Firstly, for artists (Tidal), where the main benefits come from process centralization and being able to control the entire fan relationship experience.
  • Secondly, the collaboration increases the ability for artists to effectively integrate and value upsells: as you’re at the checkout for your concert tickets, Tidal can directly integrate up/cross-sell related products such as merch to wear at the concert (bonus points if it’s limited edition, exclusive merch just for this event).
  • Finally, this allows artists to take back control of their ticket distribution, a stage that has long challenged artists of all sizes. No more scalping (or at least less, if they still sell a part of their tickets through traditional channels), so no more wild markups, and no more profiteering off the artist’s back while granting them no additional profit.

Going physical

With Square now perfectly centred in the online artist-fan relationship, there’s still further opportunity to be found. The last money-making stage of this entire process — a stage in which Square is now front and center — happens in real life, at the event location.

Square has long followed the strategy of investing in its best clients’ ecosystem.

From supplying a free Square reader to new client businesses, to creating the Square Kitchen Display System to streamline restaurant operations, Square is no stranger to spending money to make money, by helping their clients make money.

Square is following the same approach in the music industry.

By investing in a key potential customer segment, they’re accelerating their ubiquity in the space and making themselves the go-to through point for transactions.

Onto the subject of at-event transactions. Square organises around how people gather and transact, namely focusing on the under-banked or under-served. In their SMB and restaurant verticals, the data they gather tells Square where, when, and in what quantities all different types of transactions are taking place — helping identify burgeoning trends and gaining insights into seller industries. This same principle applies perfectly to the music and concert vertical.

By sitting at the point of conversion from the digital to the physical realm, Square now gets a deep look into what is driving signups, which events and artists are gaining traction, what sort of merch lines are attracting the most attention, and a probably infinite list of other data points to mix and match.

This helps bridge the physical divide as consumers make real-life payments rather than online, and establish Square more prominently among merch vendors on-site at concerts, developing new reward programs or exclusive deals along the way.

Imagine you’re a growing artist with a merch stand at your concert to 200 people.

Offering Square’s Cash App QR scan feature or using the Square card reader at the point of sale, you can seamlessly announce, say, a 30% discount on all merch purchases at the concert but only if you’re a Tidal subscriber. No complicated integration setup required. No needing to show proof of subscription at the merch stand. No having to scan the buyer list, cross-referencing the buyers with registered Tidal accounts and then issuing the 30% rebates (in the more needlessly complicated scenario). Square makes it easy to offer new ways to reward your most dedicated fans.

Now, when your fans’ Tidal accounts are linked to the same identity as their Cash App account or your Cash App virtual card, Tidal x Square will automatically deduct the discounted amount from their purchase (and probably subsidize you the artist a % of the difference).

Of course, this isn’t just charity by either company, but an incentive program to drive subscriptions to Tidal. After all, recurring revenue — even at a lower monthly price point — is almost always more valuable than sporadic higher-value purchases. By incentivising fans to subscribe to Tidal to benefit from digital exclusive offers and on-site discounts, Square is building a win-win-win situation: 

  • The artist sells more merch (and gets more data about who’s buying),
  • Square/Tidal get new recurring revenue subscribers (and also get valuable purchase data which can be packaged and offered to third-party buyers — such as indie merch stores wanting to get an early lead in stocking up on rare merch drops),
  • The fan gets a deeper relationship with the artist, gaining access to limited-release events and drops, all while getting discounts on things they already wanted.

Final thoughts

The benefits to both companies having been made increasingly clear, there’s, there’s still been a nagging question on my mind: why now?

Tidal has been growing new subscribers steadily, increasing revenues over the reported years. On the surface, Tidal X seems like a strong initial opening through which they could have developed many of these features and integrations themselves while retaining (relative) independence. Its exclusive releases are already fairly established and seem to offer plenty of chances to expand in the ways we’ve explored. Why give up control?

The answer, I believe, lies largely in the timing of the deal, during the largest drought of events in recent history. For a subscription platform that particularly differentiates itself through upsells and benefits around the subscription service itself, a lack of events equals a lack of revenues.

The COVID context has only exacerbated the financial difficulties that Tidal has been facing for a while, as net losses deepen despite growing revenues, and they face increasing challenges in paying licence-holders, and legal investigations loom. 

Given the situation, the instant cash injection provided by a majority share acquisition likely sounded like a solid deal to solve a fair few short-term struggles and let the company think about a longer-term outlook. Not to mention, on Square’s side, the situation and timing almost certainly helped lock in a more attractive price for an expansion that might have been in the plans for a while.

Price aside, sure, Tidal could surely have built out more complex artist tools and routes to monetisation over the next few years. But they’ve decided that Square’s involvement might speed up the future enough to be worthwhile.

Looking at this larger picture, what started as a “…huh? Why?”-type deal might well shape up to be a handsomely profitable move for Square, as they gain new data streams and a foothold in a new vertical, and a fuel injection for Tidal to build the tools critical to their mission.

In one aspect, though, the underlying gain is the same for both brands. Each has gained a partner aligned with their worldview, as they work to empower the non-conformists and the creators of the world.

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