Here's 1 Way a Fed Rate Cut Could Hurt This Digital Payments Leader
Key Points
The Federal Reserve lowered the federal funds interest rate by 0.25 percentage points on Sept. 17.
Square earns money on customer balances kept on Cash App.
Lower interest rates mean Square will earn less on customer deposits and its financing activities.
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The Federal Reserve adjusts the federal funds interest rate to tackle certain economic conditions, such as inflation. On Sept. 17, the Fed cut the interest rate by 0.25 percentage points to a target of 4% to 4.25%, in a move aimed at boosting a slowing labor market.
Although the move is intended to help the broader economy, not all companies will be jumping for joy that it happened. One digital payments leader that could face a headwind from this is Block (NYSE: XYZ) (formerly known as Square).
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Square's primary revenue stream comes from processing payments through its merchant ecosystem, taking a percentage of each transaction. However, it also makes money by lending to merchants through Square Loans and consumer financing via Afterpay. Square Loans doesn't charge interest (just a flat fee), but Afterpay does come with interest in some cases, so the recent and future anticipated rate cuts could affect the business.
Cash App balances also function similarly to bank deposits. When customers keep money in their Cash App accounts, Block earns interest income from those balances. This interest income from lending activities and customer balances functions similarly to the net interest income (NII) seen in traditional banks.
When interest rates fall, Block earns less interest on Cash App balances and its lending activities, which could reduce its interest revenue in the short term and weigh on margins if its deposit rates don't change accordingly. Through the first six months of 2025, Square earned around $117.8 million in interest revenue.
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Stefon Walters has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Block. The Motley Fool has a disclosure policy.
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