Here's 1 Way a Fed Rate Cut Could Hurt This Digital Payments Leader
The Federal Reserve's recent interest rate cut of 0.25 percentage points to a target of 4% to 4.25% aims to stimulate the economy but poses challenges for Block (formerly Square). The company's revenue, primarily from payment processing, could be impacted as lower interest rates reduce earnings from Cash App balances and lending activities. This may lead to decreased interest revenue and tighter margins, despite Square earning approximately $117.8 million in interest revenue in the first half of 2025.
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 (XYZ -7.48%) (formerly known as Square).
Image source: Getty Images.
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.
