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Square (NYSE:SQ)
Q3 2020 Earnings Call
Nov 05, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good day, ladies and gentlemen, and welcome to the Square third-quarter 2020 earnings conference call. I'd now like to turn the call over to your host, Jason Lee, head of investor relations. Please go ahead.

Jason Lee -- Head of Investor Relations

Hi, everyone. Thanks for joining our third-quarter 2020 earnings call. We have Jack and Amrita with us today. If you're experiencing any technical difficulties accessing our third-quarter 2020 shareholder letter, it is also available on the SEC's website.

We'll begin this call with some short remarks before opening the call directly to your questions. During Q&A, we will take questions from our customers in addition to questions from conference call participants. We would also like to remind everyone that we will be making forward-looking statements on this call. Actual results could differ materially from those contemplated by our forward-looking statements.

Reported results should not be considered as an indication of future performance. Please take a look at our filings with the SEC for a discussion of the factors that could cause the results to differ. Also, note that the forward-looking statements on this call are based on information available to us as of today's date. We disclaim any obligation to update any forward-looking statements, except as required by law.

During this call, we'll provide preliminary gross profit growth results for the month of October. These represent our current estimate for October performance as we have not yet closed our accounting financials for the month of October, and our monthly results are not subject to interim review by auditors. As a result, actual October results may differ from these estimates. Also, we will discuss certain non-GAAP financial measures during this call.

Reconciliations to the most directly comparable GAAP financial measures are provided in the shareholder letter on our Investor Relations website. These non-GAAP measures are not intended to be a substitute for GAAP results. Finally, this call in its entirety is being audio webcast on our Investor Relations website. An audio replay of this call will be available on our website shortly.

With that, I would like to turn it over to Jack.

Jack Dorsey -- Chairman and Chief Executive Officer

Thanks, Jason, and thank you all for joining us today. We know this is a busy time for everyone, especially with the U.S. election this week, so we'll keep our opening comments focused so we can get to your questions. As a company, we're continuing to take action to further our purpose of economic empowerment and commitment to financial inclusion.

Since last quarter, we announced two strategic investments that aligned with that purpose. The first was the hundred-million investment in support of minority and underserved communities and toward our commitment to ending racial justice. The second was a $50 million investment into Bitcoin, which we believe will be the native currency of the Internet and help people around the world better participate and thrive in the economy. A few updates on our two ecosystems, Seller and Cash App before I turn it over to Amrita and your questions.

Let's start with seller. We're focused on providing sellers with fast and flexible access to their funds, which has proven to be especially important this year. Square Card, our business debit card, which we launched last year, provides sellers with a way to immediately access and spend earned funds without setting up a bank account. Adoption of Square Card has increased each quarter since launch.

And in the third quarter, sellers spent more than $250 million on their cards. We also work to provide employees easier access to funds. In the third quarter, we launched two new features for Square Payroll: Instant Payments and On-Demand Pay. Instant Payments allows Square Payroll merchants to pay employees using earned funds the next business day with Direct Deposit or instantly when employees use Cash App.

On-Demand Pay gives employees a way to get their compensation faster by transferring up to $200 of earned wages per pay period into their Cash App accounts. This strengthens the integration between our seller and Cash App ecosystems and is a great example of what we can do when we connect the two ecosystems together. We continue to believe our ecosystem is a key differentiator for sellers and see an opportunity to educate businesses who are looking to adapt. During the quarter, we also ran our largest brand awareness campaign to date, with a focus on how our offerings can help sellers globally through the COVID-19 pandemic.

We expect to reach more than 50 million people in the U.S. through our campaigns in the second half of 2020. Now moving on to Cash App. With Cash App, we've continued to find ways to make financial services more relatable and accessible for individuals.

We have seen strong adoption across the Cash App ecosystem, including our stock brokerage products, which have seen the fastest adoption of any product to date. Since launching it less than a year ago, more than 2.5 million customers have bought stocks using Cash App, and billions of dollars have been traded by the end of the third quarter. With the stock products, we're focused on expanding access to investing for more customers, many of whom likely have never purchased stocks before. This quarter, we launched Auto Invest, which allows for dollar-cost averaging from recurring daily or weekly purchase of Bitcoin or stocks.

We also added the ability for customers to find stocks based on industry and performance and to get relevant news about their stocks right in the app. In closing, we have scaled not one but two ecosystems focused on expanding access to financial services for sellers and individuals. We intend to continue looking for opportunities within each ecosystem and to expand into new adjacencies beyond seller, and so we're investing for the long term and we're energized by what's possible. And with that, over to Amrita.

Amrita Ahuja -- Chief Financial Officer

Thanks, Jack. There are three topics I'd like to cover today: first, a look at our performance in the third quarter, where Cash App delivered strong growth and seller achieved positive gross profit growth and showed stability on GPV; second, an update on our business in October and what this could mean for growth going forward; third, a look at where we intend to invest in the fourth quarter of 2020 and in 2021 across both ecosystems, given the compelling opportunities ahead of us. In the third quarter, gross profit was $794 million, up 59% year over year, or 63% growth excluding Caviar. Net income was $37 million and adjusted EBITDA was $181 million.

Cash App delivered incredible gross profit growth of 212% year over year. The $385 million in gross profit Cash App generated was more than triple what it did in the third quarter of 2019. Cash App's results highlight our ecosystem's ability to help customers manage their finances. Looking at the three main drivers: first, we continue to see the strong acquisition of new customers to our platform each month, with our highest number of new customers added in a quarter.

Second, we continue to efficiently cross-sell our broader ecosystem, increasing the adoption of higher-value products such as cash card, Bitcoin, and direct deposit. We saw that customers who adopted two or more products tend to have three to four times more gross profit compared to those who only use peer-to-peer payment, and this adoption allowed customers to find growing daily utility within Cash App. In the third quarter, daily transacting actives nearly doubled year over year and represented nearly a quarter of Cash App's monthly transacting actives. Third, we saw volume per active peak in July as we benefited from increased inflows into Cash App.

This is a dynamic we've observed in the past related to seasonal tax refunds as well as direct deposits of recurring paychecks and saw, to an even greater extent, through July with the introduction of government stimulus funds. As expected, inflows stepped down from July although remained relatively steady in August and September as we continued to benefit from greater inflows into customers' accounts compared to pre-COVID levels. For our seller ecosystem, gross profit was $409 million, up 12% year over year. Excluding the 4th of July and Labor Day, seller GPV growth was relatively consistent on a year-over-year basis from July to August, followed by a modest improvement in September.

Three factors to call out here in the third quarter across key strategic areas for our seller business: first, omnichannel remains a priority and our online capabilities complement our broader ecosystem. We saw continued strong GPV growth from our online channels up to more than 50% year over year again this quarter. Second, we saw stronger growth from our international markets in the third quarter. Seller GPV in our markets outside the U.S.

grew 46% year over year in the third quarter and represented 11% of total seller GPV, up from 6% two years ago. Growth in the quarter was primarily driven by easing of restrictions in various regions as well as our strong acquisition of new sellers. Third, we remain focused on broadening our sales and marketing strategy for our seller ecosystem. Overall, across our increased go-to-market investments, we drove strong acquisitions similar to last quarter.

We track acquisitions looking at the first five weeks of gross profit from a new cohort, and our seller cohorts in the third quarter generated greater gross profit compared to those who joined our platform a year ago. Adjusted EBITDA of $181 million in the third quarter was primarily driven by top-line growth and also benefited from a $40 million release of transaction loss provisions related to our seller business as actual loss rates trended more favorably than we had previously estimated. Next, we wanted to share with you what trends we are seeing in real time and implications on growth going forward for each ecosystem. In October, we expect Cash App gross profit growth of more than 160% year over year.

We continue to grow the network through strong new customer acquisition, drive adoption of our products, and see healthy engagement and daily utility. As expected, we saw a reduction in transaction volume per active customer in October, driven by moderating inflows and stored funds, albeit still well above pre-COVID levels. Looking ahead, while the team has continued to execute, there remains a wide range of outcomes related to government inflows and how consumer behavior normalizes in 2021, which could lead to Cash App gross profit decelerating during the remainder of this year and into 2021. Given Cash App's incredible growth year to date in 2020, we will lap particularly challenging comparisons in the second and third quarter of next year.

Turning to seller. In October, we expect our seller ecosystem to achieve year-over-year gross profit growth, slightly ahead of the 12% growth that we reported in the third quarter. Seller GPV was up 8% year over year in October, which modestly improved compared to the third quarter, which was up 4%. In our international markets, we saw GPV growth of 50% year over year in October.

However, two of our largest markets, the U.K. and Canada, recently implemented more targeted shelter-in-place measures, which could affect growth in the fourth quarter. Card-not-present transactions were up 23% year over year in October, relatively consistent with what we saw during the third quarter, while card-present transactions were up 1% year over year, an improvement from the third quarter. Regional trends on card-present transactions have varied depending on the extent of shelter-in-place restrictions.

We expect to continue to observe variability related to the macro environment, the pace of recovery, and stricter shelter-in-place restrictions through the winter months, which could impact our performance. Our seller gross profit has grown faster than GPV this year, in part due to higher transaction margins, which benefited from a greater mix of debit, card-not-present transactions, and higher average transaction sizes. We recognize these dynamics driving transaction margins in 2020 could normalize in 2021. Finally, we intend on investing for the long term across both ecosystems in the fourth quarter and in 2021, and we'll share a preliminary view of where we see the greatest opportunities.

In the fourth quarter, we expect to increase non-GAAP operating expenses, excluding risk loss by at least $30 million compared to the third quarter as we continue to invest in go to market and hiring, particularly for engineers driving product development. As we plan for 2021, we again are making the deliberate decision to invest in both ecosystems as we believe we are in the midst of a transformative opportunity to reach new customers and expand each of our ecosystems. Next year, we expect to invest an incremental $800 million to $850 million in non-GAAP operating expenses, excluding risk loss, which represents growth of approximately 40% year over year. We expect the overall impact to our profitability next year to depend on top-line growth trends in 2021, which will be determined in part by a variety of macro factors where we see a wide range of potential outcomes.

For what is in our control, let's look at where we are investing in each ecosystem. For Cash App, we plan to focus on investing in sales and marketing to drive the acquisition of customers and new demographics and to engage former customers. We also plan to invest in product development to continue adding value to our customers and support in operations as the business scales. For seller, we plan to invest in sales and marketing to drive new Seller acquisition and hiring among engineers to further our product road map as we grow upmarket to serve larger sellers and as we look toward global expansion.

We expect our blended company margin to be affected by the mix shift to Cash App. As a reminder, Cash App represented nearly 50% of our business in the third quarter, up from 25% a year ago. For the full year 2020, we expect Cash App to deliver more than 10 points of margin expansion and reach profitability on an adjusted EBITDA basis. So far this year, Cash App has demonstrated strong unit economics and the ability to scale efficiently.

However, as we look at the needs of our customers, the size of the addressable market, and our team's ability to move quickly, we see compelling opportunities to invest further. While Cash App has significantly improved its profitability, it is still a much younger business and earlier in scaling its margin profile than seller. In summary, we are excited about the opportunity ahead of us to serve a wider set of needs for both new and existing customers across our ecosystems and intend to invest, given a significant opportunity ahead of us to deliver long-term profitable growth. I'll now turn it back to the operator to start the Q&A portion of the call.

Questions & Answers:


Operator

[Operator instructions] Our first question is from the line of Tien-Tsin Huang with J.P. Morgan. Please go ahead.

Tien-Tsin Huang -- J.P. Morgan -- Analyst

Thank you so much. Really strong gross profit growth here. Just thinking about the drivers, I was wondering if maybe you can comment on customer acquisition versus higher customer engagement, not only in the quarter but just looking ahead for both ecosystems. I mean, I just heard you talk about sales and marketing stepping up.

That makes sense. But I'm just curious how you're balancing this customer acquisition versus the engagement equation. Thanks.

Amrita Ahuja -- Chief Financial Officer

Sure. Thanks for the question, Tien-Tsin. Let me start by telling you where we are in the third quarter and in October on both business units in terms of these drivers, and then we can talk about where we're continuing to invest into 2021. So first, on the seller business.

In the third quarter, GPV was up 4%. Monthly growth was relatively stable throughout, improved in September and October, and then with a modest improvement to that 8% in October. Some of the key drivers there, so first, obviously, COVID restrictions helping many of our businesses as they eased throughout the quarter. And we saw that impact to our GPV but we do want to be mindful of continued variability related to restrictions.

Second, retention. So you mentioned engagement. We kind of look, on the seller business, at GPV retention for existing sellers where we compare how sellers did in the prior year -- from the prior year are doing this year. And what we saw was that GPV retention for existing sellers was down approximately 10% to 15% year over year in the third quarter and October and has held relatively stable since July.

We're seeing improving retention in verticals where restrictions were eased during the third quarter in October, such as beauty, professional services, and health and fitness. And clearly, we believe the primary driver of retention trends has been state-by-state restrictions and the impact on sellers' ability to fully reopen. When we saw certain states expanding reopenings in September and October to additional verticals, we saw the corresponding improvement in GPV retention in those states. And the third key driver was new customer acquisition, as you noted.

We've seen encouraging trends in the Seller business in the second and third quarter as we've seen growth in terms of new cohort sizes in aggregate gross profit. And we've been able to attract larger sellers over the past two quarters. You saw larger sellers increase to 61% of the share of total Seller GPV in this last quarter, up five points year over year. And we want to lean in here behind the strong ROIs historically over three times on sales and marketing investments over three years as well as new business formation, which is up strongly quarter over quarter.

Let me move next then to Cash App to telling you sort of the key drivers, some of which we talked about in the prepared remarks. And clearly, the acquisition is a part of that. So Cash App saw very strong growth in the quarter, up 212%. The three key main drivers there of that growth, first, new customer acquisition as well as win back.

We've already attracted a lot of customers, and bringing them back to the platform can oftentimes be more efficient. And with the network effects that we have, we have the ability to lean in and scale more quickly, particularly as we've seen lifetime values go up, we can invest differentially into this network. Second, product adoption and engagement. We've seen continued strong attach on Cash Card, which is still at about one in four related to our monthly actives.

And so we think there's further room for growth there as well as on new products like stock brokerage, which has two and a half million customers now and is our fastest product to ramp. And then the third key driver of Cash App growth is the strong volume per active, which as I mentioned, we saw peak in July before slowing down, as we expected, related to the falloff of government inflows. Now as we look at 2021 based on all of that, where do we want to invest? You definitely heard from us that we want to lean in further to grow the networks of both of these businesses while continuing to work with existing customers, bringing them more value through additional products. We will, as I mentioned, be investing.

We expect to invest an incremental $800 million to $850 million in non-GAAP operating expenses, excluding risk loss, which is growth of about 40%. The way we expect that to break down, that incremental spend, is about half of it to go toward go-to-market investment, sales, and marketing to both bring back lapsed customers as well as to focus on new customer growth across both ecosystems. That includes growing the sales team for seller and leaning in further to our network effects on Cash App. About a quarter of that stepped-up investment will go toward product development, continuing to refine our existing products as well as building new products into both ecosystems with a global focus.

And then the final quarter, it goes toward G&A, including support and operations infrastructure to scale our businesses and particularly building in automation, AI, and ML capabilities so that we can scale these sustainably going forward.

Tien-Tsin Huang -- J.P. Morgan -- Analyst

Got it. Thanks for the complete answer. Good growth. Thank you.

Amrita Ahuja -- Chief Financial Officer

Thank you.

Operator

And your next question is from the line of Lisa Ellis with MoffettNathanson. Please go ahead.

Lisa Ellis -- MoffettNathanson -- Analyst

Hi. Good afternoon. Thanks for taking my question, guys. All right.

I wanted to ask about Cash for Business. Very exciting. You broke out some new numbers this quarter, 10% of GPV. We love that because it's a little two-sided network.

Can you elaborate a little bit on where you're gaining this traction with Cash for Business, and is it net new business or replacing some of your micro sellers? And then also just a little bit more color on the economics. I know the take rates there are around that 2.75%. But is the funding mix here actually more attractive because it's funding out of stored balances as well, any additional color there? Thank you.

Jack Dorsey -- Chairman and Chief Executive Officer

Hey, Lisa. Thanks for the question. So the way to think about Cash for Business in terms of like what we're seeing in seller adoption is it's very similar to the patterns we saw early on in the company's history with the free reader. So we saw sellers, saw providers, smaller sellers pick it up and use it in a variety of ways.

What's different about Cash for Business, of course, is it's all digital and allows those sellers to manage their business through peer-to-peer transactions to their $Cashtag. And it also provides them higher weekly limits and relevant tax reporting forms. We did see a new pattern emerge during COVID-19 because it allows for contactless transactions with their buyers and with their customers. But we see proprietors like beauty, online retail, we've seen local businesses use it to collect donations.

We think there's a lot of opportunities here. And we do believe that it's quite powerful. The customers using Cash for Business transacting much more frequently across our ecosystem compared to other customers in Q3. So it again just strengthens the Cash App ecosystem.

And more broadly, as some of those sellers graduate, they can also use the tools offered by the seller business as well.

Amrita Ahuja -- Chief Financial Officer

And, Lisa, just to weigh in on your question with respect to economics. So Cash App business GPV, which is composed primarily of Cash for Business volumes as well as a small piece from peer to peer funded by credit card, Cash App business GPV was $2.9 billion, as you noted, about 9% of Square's total reported GPV. And we see transaction revenue here of about $81 million. Both of those metrics were up more than 300% year over year in the quarter.

We monetize Cash for Business at 2.75% of volumes, and these Cash App volumes did provide a benefit to our transaction margins as well, given the funding mix, as you noted. We're doing more work to understand our customer needs here, as Jack mentioned, and we recognized some of this uplift in growth may be related to COVID-specific trends that could potentially normalize and we'll continue to monitor.

Lisa Ellis -- MoffettNathanson -- Analyst

Wonderful. Thank you.

Amrita Ahuja -- Chief Financial Officer

Thanks, Lisa.

Operator

And your next question is from a Square Seller, Jared Sorensen. Please go ahead.

Jared Sorensen -- Square Seller

Thank you. Yes. My business is about selling large gourmet cookies and my business name is Texas Cookie Shop. Currently, when a customer comes into the store, they can buy cookies, either like one at a time or in boxes of six or a dozen.

When I do sell a half dozen or a dozen, the POS will automatically add the volume discount. However, the website that I have does not. So I wanted to know, is it on the road map to provide the shopping cart with similar automatic volume pricing options?

Jack Dorsey -- Chairman and Chief Executive Officer

Yeah. Thank you, Jared. Thank you for being a customer as well. We do plan to enhance this on Square Online Store to provide similar automatic pricing options, as you mentioned, in sort of the point of sale.

The prerequisite functionality to support the feature's in development. So we're going to work as fast as we can to get it out to you and definitely appreciate any feedback on the remaining gaps that might help you serve your customers better.

Jared Sorensen -- Square Seller

Yeah. That'll be perfect. Thank you very much.

Jack Dorsey -- Chairman and Chief Executive Officer

Thank you so much.

Operator

And your next question is from the line of Timothy Chiodo with Credit Suisse. Please go ahead.

Timothy Chiodo -- Credit Suisse -- Analyst

Thank you for taking the question. All right. My question is a follow-up on the update you gave on the Square Card earlier this afternoon. It's a topic that's also somewhat related to my question last quarter around the SMB digital banking opportunity for Square.

So you noted the volume has ramped up to $250 million this quarter. And that math suggests it's in the ballpark, give or take, about 1% of seller volume. So it seems like a long runway ahead. And I was hoping you could give maybe some added thoughts on some of the things that either you have been doing or can do to address this opportunity.

It does seem like a long runway for a product that really seems to be a win-win for the sellers and for Square.

Jack Dorsey -- Chairman and Chief Executive Officer

We agree completely. And the way to think about the Square Card is kind of in the vein of a use case of getting people, whether they'd be individuals or sellers, faster access to their funds. It just matters so much, and that's what Square Card represents, is sellers get to utilize their money much faster. And since launch, we've seen adoption growing with more sellers using it each quarter.

We saw sellers using the card upon joining Square. And in the third quarter, 50% of the Square Card sellers ordered their card within the first month of onboarding, which is pretty incredible. And we're seeing sellers use the card for everyday expenses like gas stations and discount retailers, their own inventory. So we're watching very closely the patterns in terms of how people are using it, where we can improve it, what we can build on top of the card or adjacent to the card.

But there's a vein in this use case of cash flow management, of enabling faster access to funds is very rich for us. And they'll come in many manifestations, and Square Card is just one of the latest, and definitely excited about their performance recently.

Amrita Ahuja -- Chief Financial Officer

And from a revenue perspective, Square Card is relatively small today. We expect it to ramp over multiple years, both for new merchants and increased monetization from the existing base as we add those new features to help sellers manage their balance. Similar to the dynamic we've seen on the Cash App ecosystem, the card enables people to keep their funds and sellers to keep their funds within our ecosystem, which leads to higher customer lifetime value. So it's something we're encouraged to keep building out.

Timothy Chiodo -- Credit Suisse -- Analyst

Yes. That all makes a ton of sense. Thank you so much both of you for the answers there. A brief, brief follow-up.

We don't have to spend too much time on this, but you did mention the retention ratio is kind of similar to July and for the Seller business at down 10% to 15%. And when I just look at the positive volume growth, it just implies that that gap there, it really implies a pretty big new cohort that's come on. And you characterized it a little bit talking about how they're generally larger sellers, higher gross profit. And I know it's hard to say because most of these sellers are self-onboarding.

But if you could give any context that you might have around what these sellers might have been doing before. Given their size, I'm assuming that they were probably already accepting payments in some way.

Amrita Ahuja -- Chief Financial Officer

Well, look. When you look at the opportunity ahead of us, we've sized our TAM in materials earlier this year. We think the vast majority of the market, especially a larger seller market, being addressed today on legacy platforms, legacy infrastructure and platforms that we believe aren't as flexible as ours can be with integrated payments, financial services, hardware, software. And we did see growth in our larger seller cohorts.

And if you look at larger seller GPV, it's about 13% growth year over year relative to the entire base at 4% growth year over year. And we do believe that's related to the stronger acquisition of larger seller cohorts, as we mentioned, onboarding in both the third quarter and second quarter. So we believe that our unique platform has a real opportunity to address these larger, more complex seller needs through multiple different products that we can offer.

Timothy Chiodo -- Credit Suisse -- Analyst

Great. Thank you so much for taking the questions.

Operator

The next question is from the line of Darrin Peller with Wolfe Research. Please go ahead.

Darrin Peller -- Wolfe Research -- Analyst

Hey, guys. Thanks. Nice job on the quarter. I wanted to just to hone in on beyond just obviously cash for the business being a big driver of volume right now.

We saw some pretty material growth in the online side or really just card not present again up, I think, it was 24% versus 16% last quarter. If you could just talk a little more on the strategy there and maybe just the other big driver being international, which again, you guys talked about up, I think it was 46%. Maybe just if you don't mind honing in a little more on the strategic initiatives on both those sides, how big can that get as a percentage of the mix in the next couple years?

Amrita Ahuja -- Chief Financial Officer

Maybe I can kick us off. It sounds like you're looking for some more color around online and international. And we've seen strong traction in both areas, as you noted. And in the third quarter, we saw continued strength in GPV from our online channel, which grew over 50% year over year, consistent with the growth we've seen on average over the past year and a half.

And then when you combine the two, when you look at online channel growth outside of the U.S. and our international markets, that was even stronger at over 60% in the third quarter, driven by strong adoption of e-commerce API, invoices, Square Online, all the variety of online products that we provide that complement that broader ecosystem. And as you look at Square Online at the front door now for us, we're also seeing encouraging trends there where one in two new sign-ups to Square Online are new to Square more broadly in October. I think last quarter we had told you one in three.

And so we've seen some improvement in that as well where we can help our customers from an omnichannel perspective, including for these online products and features.

Jack Dorsey -- Chairman and Chief Executive Officer

And just on the international side, global growth remains a top priority for both ecosystems. But just looking at Seller for a minute, since the beginning of our expansion and through the end of 2020, we will have had 85 product launches in the 4 markets we serve across hardware, software, and our financial service offerings. And just for example, we recently launched Square for Retail in the U.K., in Australia, and Square Online in Japan. So we want to continue to make sure that the product offerings that we have in the U.S.

are rolled out to the rest of our markets as well, and of course, always evaluating additional markets for potential expansion as well. And Cash App in terms of global growth, it is also a priority for us and a top priority for us. We launched in the U.K. and we also launched cross-border payments between the U.S.

and the U.K. And we think there's a lot of potential here. We acquired a company called Verse in Spain, which gives us an opportunity to learn from the peer-to-peer growth in European markets. So right now, we continue to add all these aspects that help us learn and to really make sure that we're expanding around the world in a smart way.

Darrin Peller -- Wolfe Research -- Analyst

I mean, it does look like there's been an inflection in international. That's great to see, guys. Thank you.

Jack Dorsey -- Chairman and Chief Executive Officer

Thank you so much.

Operator

Your next question is from the line of Rayna Kumar with Evercore ISI. Please go ahead.

Rayna Kumar -- Evercore ISI -- Analyst

Good evening, Jack and Amrita. Can you discuss your recent thoughts on capital allocation and specifically your appetite for acquisitions? Maybe what types of acquisitions interest you the most today and which businesses to be most additive to Square? Thank you.

Jack Dorsey -- Chairman and Chief Executive Officer

Well, I'll take the first part. I mean, we definitely have an appetite for acquisitions, both in terms of products and also great teams. We've shown some examples of the categories that we're looking at. We certainly want to continue to add more force behind some of the trends that we're seeing within our space such as artificial intelligence and also a cryptocurrency and, specifically, Bitcoin.

We've certainly looked at multiple products that we can learn from. And as we add to the company, we learn much more from we're completing offering. So we're constantly looking for great teams or great products that complement or are adjacent to our key ecosystems of seller and Cash App. And we want to make sure that we're pretty open not just with acquisitions in the U.S.

but also abroad because great companies are being more and more found all around the world.

Amrita Ahuja -- Chief Financial Officer

And, Rayna, just to jump in on the capital allocation piece of it, obviously, a key piece of that is where we're investing internally and ensuring that we maintain discipline and that we're going after the biggest opportunity. So I had mentioned earlier that step-up of investment next year, $800 million to $850 million. We expect the majority of that to go toward our ecosystem, about 60% directed to Cash App and about 40% directed to seller while also leaving some room to test and learn around other new strategic investment areas. Within seller, we expect to grow our sales and marketing investments by 40% to 45% year over year in 2021 across brand and awareness marketing to drive top of funnel demand, doubling the size of our sales headcount next year and our account management team to address larger seller needs and where we've seen efficient returns even during COVID this year.

And an increasingly global focus that we've mentioned, deploying these campaigns across international markets. From a product development standpoint within seller, we want to build out those engineering data science design teams who can expand the ecosystem and, among other things, focus on some of the products that reach larger sellers like the vertical-specific features and developer APIs as well as bringing those products more globally. And then finally on Cash App, the step-up of investment there. We talked about acquisition and win-back.

We've already started deploying this year an increased investment around paid marketing, and we've seen strong returns on that with payback at less than a year. And again, with low customer acquisition costs and growing our lifetime value, we see strong returns on these investments. From a support perspective, Cash App has rapidly scaled this year, and customers are increasingly using Cash App for broader services beyond peer to peer. So we intend on scaling our support in other operations infrastructure for the business in 2021.

We expect the magnitude of the step-up to be onetime in nature. And we envision operating leverage in this area in the future, because of the investments in things like AI and machine learning, to drive automation and efficiency. And finally, product development on Cash App, the team has delivered strong product velocity over the years with a mix of major new launches as well as adding feature development, and we expect to continue to do that into the future.

Rayna Kumar -- Evercore ISI -- Analyst

Very helpful. Thank you.

Operator

The next question is from the line of Pete Christiansen with Citi. Please go ahead.

Pete Christiansen -- Citi -- Analyst

Hi. Good evening. Thanks for taking my question. Amrita, thanks for the color on the potential for the tougher comps in certain quarters, and I know it's challenging in stripping out the impact of stimulus that you've seen.

But I guess looking at growth in customer funds, at least sequentially, I think it was up 70% in the quarter. Should we think of that as, at least on the Cash App side, as an underlying growth rate for the existing base? I'm trying to exclude the big rapid spending and the new customer acquisition that you've set forth. But do you see that as a good level that investors should think about going forward, at least for the next quarter or two?

Amrita Ahuja -- Chief Financial Officer

Hey, Pete. Thanks for the question. Maybe we can talk about the number. I think you were talking about stored funds, which were up for Cash App, which were up 7% quarter over quarter.

Correct me if you're wrong if that's the number --

Pete Christiansen -- Citi -- Analyst

No. That's correct. Yeah.

Amrita Ahuja -- Chief Financial Officer

OK. Yes. Look, stored funds for us is one indicator of the use of the Cash App platform and, obviously, as a factor of inflows into the platform and outflows from the platform. The more we can keep our customers, we can deliver value to our customer base through a variety of products, including Cash Card, investing, et cetera, the more we have the ability to give people a reason to store their funds within Cash App.

We do recognize, as you noted, the impact of the stimulus, which drove us to sort of peak levels in terms of stored funds. We were at about $2 billion in stored funds in July before seeing a decrease in October at about $1.75 billion in stored funds, down about 10% from July to October. And we think that that's likely related to inflows related to these sorts of government funds. And that's why we noted on the call that in the absence of further government funds, we can see normalization around -- and we're already seeing normalization around that one driver of volumes per active and could expect to see further deceleration there for the remainder of Q4 and into 2021.

And again, we think about the Cash App business on a two-year basis here to help normalize for some of the acceleration we saw this year. Cash App has delivered over 170% gross profit growth year to date on a year-over-year basis this year. And so we may see those trends normalize over time and we'll look at things from a 2019 to '21 basis to normalize for some of that growth.

Pete Christiansen -- Citi -- Analyst

That's helpful. And just as a quick follow-up, I know there was a big discretionary spend this last quarter, new acquisition growth. How are you seeing the adoption of cash card? I know that's typically a quick add for a new Cash App user initially. Are you seeing similar take-up levels when you're signing on a new Cash App user converting to cash card?

Amrita Ahuja -- Chief Financial Officer

Yes. I think we noted in our quarter -- in the earnings call last quarter that we had seen faster product adoption among new customers, those new cohorts of customers, as we noted in our 2Q call on Cash App, and that included for things like cash card. As of the end of June, we had over 7 million monthly actives on cash card, and the majority of them spending over five times per week in June. And we've seen strong engagement since.

You obviously saw that play out in the quarter for us as well. And we think that there's more to do here. Cash card has achieved strong adoption at nearly one in four of our monthly actives, using cash card on a monthly basis in June. And we think that there's even more that we can do in terms of surfacing cash card and the Boost product and the related features to our customers in an even greater way as we move forward.

Pete Christiansen -- Citi -- Analyst

Thank you. Really helpful. Thank you.

Amrita Ahuja -- Chief Financial Officer

Thanks.

Operator

[Operator instructions] Our next question is from the line of Ramsey El-Assal with Barclays. Please go ahead.

Ramsey El-Assal -- Barclays -- Analyst

Hi. Thanks for taking my question. I wanted to ask about whether you have any initiatives or plans in place to build out a broader kind of B2B product set, I guess, especially in Seller. It seems like that type of a thing like AP, AR automation, supplier payments would fit like a glove in terms of what you're already offering your customers.

Just curious what your view is on the B2B opportunity for Square.

Jack Dorsey -- Chairman and Chief Executive Officer

Yes. Thank you for the question. I think there's a lot of opportunity. And we certainly were kind of pulling at this thread when we launched the Square Card by incentivizing Square merchants to shop at other Square merchants.

So there is something there that we're excited about. And it is a pattern and a use case that we want to watch more closely, but we have nothing to talk about today. Right now, we continue to focus on the most critical aspects to run the business, to better serve customers, and also a lot around customer relationship management. But as we continue to make that more robust, there are certainly adjacencies that are very interesting and something that we'll look deeply at.

Ramsey El-Assal -- Barclays -- Analyst

Sure. Thank you.

Operator

Your next question is from the line of James Friedman with Susquehanna. Please go ahead.

James Friedman -- Susquehanna International Group -- Analyst

Hi. It's James with Susquehanna. I noticed, Amrita, you released some reserves, if you could describe where you are in that journey. It was a bigger conversation, obviously, earlier in the year.

Any update there would be helpful. Thank you.

Amrita Ahuja -- Chief Financial Officer

Sure. Happy to help with that. Overall, in the third quarter, transaction and loan loss expenses were $15 million, down 54% year over year, with that decline primarily driven by the $40 million release of an existing provision for the seller business related to the first half of the year, which more than offset the increase in provisions related to the third quarter. And when you look on a year-to-date basis for seller in 2020, transaction losses as a percent of GPV is trending at about 1.7x what we would have seen in terms of a quarterly average in 2019.

This is above the 3x that we had estimated back in the second quarter. And that reflects our current provision levels for risk loss on these cohorts year to date. To break that down across the various cohorts, first quarter and then second and third quarters: for the first quarter where transaction risk loss trends have now matured, transaction losses represented an increase of about 1.2 times year over year on a dollar basis; and for the second and third quarters, we're now provisioned at about two times greater on a year-over-year basis on a dollar basis, given the ongoing uncertainty for those more recent cohorts. Let me know if that answered your question, Jamie.

Obviously, future provisions here are going to depend on a bunch of puts and takes that we're going to continue to monitor related to the broader macro environment.

James Friedman -- Susquehanna International Group -- Analyst

That's great. Thank you very much.

Amrita Ahuja -- Chief Financial Officer

Thanks.

Operator

Your next question is from the line of Josh Beck with KBCM. Please go ahead.

Josh Beck -- KeyBanc Capital Markets -- Analyst

Thank you for taking the question. Yeah. I found the commentary around really these new cohorts that you're bringing in on the Seller side are actually -- seems to be contributing more than the similar cohorts a year ago. It certainly seems like the number of products that Cash App users are adopting is up.

So just would like to hear a little bit about maybe how that influences the LTV to CAC equation and really how that is influencing your investment philosophy as we move forward.

Amrita Ahuja -- Chief Financial Officer

Sure. Maybe starting just on what we're seeing so far with the stepped-up investments in go-to-market for the seller business. We increased our investments meaningfully in the third quarter as we had told you last earnings call, excluding Cash App other sales and marketing expenses, which is primarily reflective of the pace of seller investments, were up 63% year over year on a GAAP basis. What we were doing was we launched an awareness marketing campaign across a range of new channels, including TV, radio, podcasts, etc., and we expect to reach, through those channels, 50 million people in the second half of this year.

These campaigns really tell a broader story on the ecosystem, and it specifically speaks to larger sellers in terms of the range of products that we have to meet their needs. These campaigns do have longer payback periods than performance marketing, but we've also seen that they drive top-of-funnel interest, which allows us to scale performance marketing, and we see further opportunity to do that in '21 as well. And then similarly, sales and account management teams have generated efficient paybacks in 2020. We're doubling the size, as I mentioned, in the sales team in '21.

And that's been able -- that's helped us reach more and more larger sellers, which now account for 61% of Seller GPV. When we think about reaching these larger sellers who can take on more products with us, that certainly has an impact on lifetime value, which is why we want to measure these investments against ROI and look at that sort of longer-term duration of a partnership with a seller and how we can deliver value to them and see increased value from the sellers, which enables us to lean in even further to that. From a Cash App perspective, where we've been investing, it's been about a year now since our first paid ads for Cash App. We launched them for the first time in December 2019.

And with ARPU and lifetime values up 3x over the past three years, we've seen significant room to scale, marketing spend still at very strong ROI. We ramped paid marketing for Cash App in the third quarter and into October with low customer acquisition costs across a variety of new channels. And we have seen compelling payback so far on that acquisition spend at less than a year. Of course, the key piece of that is related to the ability to drive stronger value into the ecosystem and, therefore, stronger ARPU and lifetime value of these customers, which becomes a flywheel.

It enables us to invest more both into the product and in the go to market.

Josh Beck -- KeyBanc Capital Markets -- Analyst

Really helpful. Thanks, Amrita.

Amrita Ahuja -- Chief Financial Officer

Thanks, Josh.

Operator

Your next question is from the line of Andrew Jeffrey with Truist Securities. Please go ahead.

Andrew Jeffrey -- Truist Securities -- Analyst

Hi, and good afternoon. Appreciate taking the question. I wonder if you could talk a little bit about what you see as the role of QR code in retail generally but maybe in restaurants, in particular, and whether that's a capability Square is going to move progressively to support at any point?

Jack Dorsey -- Chairman and Chief Executive Officer

Yes. So on the store side, we had self-serve ordering capabilities by QR code, and that integrates with the restaurant's kitchen and payment systems. We also have QR codes built into the Cash App and are seeing really strong adoption and usage there. Generally, I think it's just a function of the speed of the OS and how easy the OS makes this adoption.

Obviously, other markets have adopted it very strongly. But we have all the functionality in place. And as people get more and more comfortable using it, especially in the U.S., I imagine we'll see more. But I do think it's a broader function of how fast it is versus other technologies.

It's certainly competing with NFC as well, which is pretty fast. But we want to make sure that a seller and an individual using Cash App has every available tool to them so that they can meet their customers wherever they happen to be.

Andrew Jeffrey -- Truist Securities -- Analyst

Appreciate it. Thank you.

Jack Dorsey -- Chairman and Chief Executive Officer

Thank you.

Operator

And the final question is from the line of Bryan Keane with Deutsche Bank. Please go ahead.

Bryan Keane -- Deutsche Bank -- Analyst

Hi, guys. Congrats on the results. I just wanted to ask or just follow up and ask about further penetrating inside of cash card and direct deposit. What are some of the things you can do to help drive that penetration even higher? I know Cash Card's at 25% today, but it feels like there's some room to push that higher.

I think you mentioned maybe Boost and some other things, and maybe that's part of the spend next year to get that adoption up. Thanks so much.

Amrita Ahuja -- Chief Financial Officer

Maybe I can start off on this one. I think there's a couple of different ways that we can approach driving cash card, and you mentioned direct deposit, you mentioned Boost. We view these products as working together as an ecosystem. And it's part of our work to surface these products in a straightforward and frictionless way to our customers.

With respect to Direct Deposit, we have seen steady month-over-month growth in the number of customers depositing their recurring paychecks, which continued into the third quarter. We know that direct deposit customers typically pool more funds. They have pooled more funds in the Cash App, they stored higher balances. They've adopted more products, including cash card, where they typically spend multiples more than other cash card actives do, all of which has driven monetization and lifetime value for that direct deposit customer.

So we do see a strong correlation of these products driving usage into other products, and in this example, direct deposit into cash card. So we continue to focus on developing the features around both products and the broader ecosystem together.

Bryan Keane -- Deutsche Bank -- Analyst

Great. Thank you.

Operator

And I would now like to turn the call back to the company for closing remarks.

Jason Lee -- Head of Investor Relations

Thank you, everyone, for joining our call. I would like to remind everyone that we will be hosting our fourth-quarter 2020 earnings call on February 23rd, 2021. Thanks again for participating today.

Operator

[Operator signoff]

Duration: 54 minutes

Call participants:

Jason Lee -- Head of Investor Relations

Jack Dorsey -- Chairman and Chief Executive Officer

Amrita Ahuja -- Chief Financial Officer

Tien-Tsin Huang -- J.P. Morgan -- Analyst

Lisa Ellis -- MoffettNathanson -- Analyst

Jared Sorensen -- Square Seller

Timothy Chiodo -- Credit Suisse -- Analyst

Darrin Peller -- Wolfe Research -- Analyst

Rayna Kumar -- Evercore ISI -- Analyst

Pete Christiansen -- Citi -- Analyst

Ramsey El-Assal -- Barclays -- Analyst

James Friedman -- Susquehanna International Group -- Analyst

Josh Beck -- KeyBanc Capital Markets -- Analyst

Andrew Jeffrey -- Truist Securities -- Analyst

Bryan Keane -- Deutsche Bank -- Analyst

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