Snap (NYSE:SNAP) will pull the plug on Snapcash, its mobile peer-to-peer payments app for Snapchat, on Aug. 30. Snap launched Snapcash in late 2014 via a partnership with Square (NYSE:SQ), but it didn't gain much ground against bigger rivals like PayPal's (NASDAQ:PYPL) Venmo, Square's own Cash app, and Zelle.

Venmo, Zelle, and Square Cash were the three most popular mobile P2P payment apps (in that order) in the U.S. last year according to eMarketer. Those three apps had a combined monthly active user (MAU) base of 40 million.

A woman uses a smartphone to make a payment.

Image source: Getty Images.

It's unclear how many MAUs Snapcash has, but Snap's retreat indicates that a low percentage of its 191 million daily active users (DAUs) use the service. Let's look back and why Snap launched Snapcash, and why it fell short of expectations.

Betting on a market for social payments

Snap was still experiencing torrid growth in 2014. Snapchat's DAUs surged more than 50% between the first and fourth quarters of the year. The company rejected a $3 billion buyout offer from Facebook (NASDAQ:FB) in 2013, and rode high on the media hype about ephemeral messages disrupting the social media market, especially among younger users.

Snap's partnership with Square, which disrupted the traditional market for POS (point of sale) systems, seemed like a great partnership between two disruptive companies. Turning P2P payments into a social experience instead of one restricted to single apps or websites seemed like a smart strategy that could harm market leaders like PayPal.

Unfortunately, PayPal leveraged its massive online presence to promote Venmo, the mobile P2P payments app it acquired in 2013. Meanwhile, over 30 U.S. banks started promoting Zelle as their preferred P2P payments network to counter Venmo and Square. To make matters worse, Facebook also entered the market by adding P2P payments to Messenger and in-app payments to Instagram.

Why Snap is abandoning the market

As a result, Snapcash never evolved into a revolutionary P2P payments platform. Instead, it mostly flourished in the seedy niche market of payments for erotic content. That was bad news for Snapchat, which was struggling to shake off its initial reputation as a sexting app.

Meanwhile, Snapchat's user growth decelerated. Its DAUs rose 15% annually last quarter, but that marked just 2% growth from the previous quarter. Instagram also constantly cloned Snapchat's features -- including its ephemeral messages, stories, and filters -- to win over younger users.

A young woman takes a selfie on a street.

Image source: Getty Images.

Snapchat's average revenue per user (ARPU) also tumbled 21% sequentially last quarter, indicating that advertisers were losing interest in the once-hot platform. Seasonal headwinds, headline-grabbing clashes with celebrities, and a controversial redesign of its app -- which split celebrities from friends -- exacerbated the pain.

Snap's net loss also widened from $350 million in the fourth quarter to $386 million in the first quarter as its cash and marketable securities fell 10% to $1.8 billion. Snap initiated two rounds of layoffs to cut costs, but it's doubtful that it will generate a profit anytime soon.

Snap's lost opportunities

Those factors all indicate that it's a smart move to abandon Snapcash. But by killing Snapcash, Snap could also kill its fledgling e-commerce efforts. Earlier this year, Snap launched the Snap Store, a part of Snapchat's Discover tab that lets users purchase Snapchat-branded products.

Earlier this month, TechCrunch noticed that Snapchat's code included new features, codenamed "Eagle", which could let users scan objects or barcodes with the app's camera to see product search results on Amazon (NASDAQ:AMZN). The prospect of a partnership with Amazon sounded enticing, but Snap subsequently removed the code.

That move, along with its decision to kill Snapcash, indicates that Snap isn't ready to turn Snapchat into a social e-commerce platform. That's probably the right move, since similar strategies at Facebook and Instagram haven't turned those platforms into major shopping apps.

But Snap still lacks focus

Shutting down Snapcash was a step in the right direction, but the company is still investing in side bets like augmented reality glasses and camera-based video games. Snap might argue that those products can widen its moat against Facebook, but its decelerating user growth and widening losses indicate that it might need to make some tough calls about those projects in the near future.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Amazon and Square. The Motley Fool owns shares of and recommends Amazon, Facebook, PayPal Holdings, and Square. The Motley Fool has a disclosure policy.