Please ensure Javascript is enabled for purposes of website accessibility

Square's Real Plan to Monetize Cash App

By Adam Levy - Updated Feb 27, 2018 at 3:45PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Square's peer-to-peer payments app is losing money, but here's how it can provide value to Square.

Square's (SQ -2.68%) Cash App has consistently topped PayPal's (PYPL -0.49%) Venmo in downloads on the iTunes U.S. charts over the last three months. The peer-to-peer payments app has a growing user base, and it keeps adding new features (such as bitcoin purchases) to keep them engaged.

But in terms of monetization plans, Square is way behind Venmo. Its relatively small Cash for Businesses feature charges a 1.5% processing fee on payments, but it hasn't made very significant headway. Additionally, the option to withdraw funds immediately for an extra fee only appeals to a very small group of users. Meanwhile, PayPal says services it can monetize on Venmo -- like Pay With Venmo -- are growing faster than Venmo's peer-to-peer payments at the same point in its history.

In a recent interview, Square CFO Sarah Friar hinted at the idea that maybe Square doesn't need to generate revenue directly off of transactions in the Cash App to monetize it. Instead, it could gather valuable data from the app for use in other applications.

The Cash App and Cash Card from Square.

Image source: Square.

Square Capital for consumers

One of Square's most notable ancillary businesses is Square Capital, which offers loans to its merchants. Square has originated over $2 billion in small business loans since it launched Square Capital in 2014, doling out an average of just $6,000 at a time.

"On top of that we're building an asset called Cash App," Friar said earlier this month at the Goldman Sachs Technology and Internet Conference. "And as we start to see that really take off in terms of growth, we're excited by ... this new look into a consumer's profile." That's to say the data Square collects from Cash App users can be used to make similar lending decisions to Square Capital's small business loans.

Square is already enabling small merchants to finance purchases for their customers through Square Capital. Using data from Cash App can help make better consumer lending decisions as well as open new ways to offer loans directly to consumers.

A framework for thinking about Square's recent moves

In the fall of 2016, Square made a big change to the Cash App. Instead of instantly transferring money to your bank account, it would store the money in your Cash account. Withdrawals now take a couple days to reach your bank account.

The move not only saved money for Square (it's expensive to process instant deposits), but many saw it as a way to start monetizing the platform through convenience fees.

In fact, the more valuable development may have been the introduction of a virtual debit card, which users could use to spend down their Cash balance. The company subsequently launched a physical debit card last summer.

The debit card also provides a way to collect fees for processing, but the revenue is minimal as most of those fees are likely passed onto the payments network. Square even offers promotional discounts to incentivize users to use their debit card, taking a loss on some transactions.

Finally, last fall Square started rolling out the option to buy bitcoin from within the Cash App. That became available to all users at the end of January. But Square doesn't take a commission on bitcoin purchases, so it doesn't generate revenue from that service, either.

What Square is getting out of these moves is a tremendous amount of consumer data. Bitcoin purchases encourage users to store money in the Cash App. The debit card provides data about how users spend that money. That's data Square can use to make instant lending decisions.

PayPal shows the potential of consumer loans

It's worth noting PayPal already offers instant lending decisions for consumers. The company held nearly $8 billion in loans between its consumer and merchant lending businesses as of the end of 2017, and that business is growing faster than its payments processing business.

PayPal's had a significant head start on Square in collecting consumer data, as Square has focused primarily on merchants. But PayPal's success also shows the potential in collecting consumer data and making lending decisions using it. That's how Square can really monetize the Cash App, not by nickel and diming its users.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Block, Inc. Stock Quote
Block, Inc.
$63.84 (-2.68%) $-1.76
PayPal Holdings, Inc. Stock Quote
PayPal Holdings, Inc.
$71.47 (-0.49%) $0.35

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/29/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.