Buried deep within Block's Q1 2024 earnings call, a seemingly insignificant detail hides a potential game-changer for the company's banking ambitions: the dramatic decline of "manual keyed entry" (MKE) transactions on the Square platform. While analysts focused on headline gross profit growth and profitability, this quiet shift reveals a powerful undercurrent, hinting at Block's strategic positioning for a dramatic leap forward in the world of banking.

MKE transactions, where sellers manually enter card information instead of swiping or using contactless payments, represent a less sophisticated segment of Block's merchant base. These are often smaller businesses, perhaps operating with older technology or relying heavily on phone orders. A decline in MKE transactions suggests these sellers are either upgrading their systems, leaving the platform, or seeing a shift in customer payment behavior.

The numbers tell a compelling story. In Q4 2023, MKE volume represented just 13% of Square's GPV, a significant drop from over 16% just two years prior. Block acknowledges this trend and anticipates a continued decline, albeit at a moderating pace. They attribute this shift to "software-enabled payments" becoming an increasing driver of their business.

Here's where the banking connection becomes crucial. This move towards "software-enabled payments" inherently favors larger, more established businesses. These are precisely the businesses that are also more likely to benefit from, and adopt, Block's suite of banking products: loans, instant transfers, checking accounts, and more.

"Consider this: a small, cash-heavy business relying on MKE transactions likely has little need for a Square loan. However, a growing multi-location restaurant, utilizing sophisticated POS systems and online ordering, would find Block's lending products immensely valuable."

Block's focus on eliminating product gaps in its Square ecosystem, particularly those aimed at the food and beverage sector, further reinforces this hypothesis. Features like pre-authorization for bar tabs, specifically designed for larger establishments, demonstrate a strategic shift towards a higher-value, banking-ready merchant base.

Growth of Square Banking Gross Profit

Square's banking gross profit in Q1 2024 grew a staggering 36% year-over-year, becoming the "key driver of delta between gross profit and GPV growth." If this trend continues, driven by attracting larger, "software-enabled" merchants, Block's banking segment could become a dominant force, eclipsing even its instant deposit revenue streams.

This strategy aligns perfectly with Jack Dorsey's stated goal of becoming a "top provider of banking services." The decline of MKE transactions is not just a technical detail, it's a canary in the coal mine, signaling a seismic shift in Block's merchant composition, one that favors a more sophisticated, banking-ready clientele.

Block isn't just providing payment processing anymore, they're building a comprehensive financial ecosystem for businesses, and the shrinking MKE volume is a whisper of the banking revolution brewing within the company.

"Fun Fact: Did you know that Block was originally founded as "Squirrel"? Jack Dorsey later changed the name to "Square" to reflect the simple, square shape of their first card reader. Perhaps the decline of MKE transactions, paving the way for a more complex financial landscape, mirrors Block's own evolution from a single, simple product to a multi-faceted financial powerhouse."