Square (SQ 0.18%) introduced the Cash Card -- a debit card product attached to its Cash App -- about one year ago. As of June, users are spending at a $3 billion run rate, a threefold increase since December. Cash Card has been an undoubted success for Square. In the company's second-quarter earnings call, management called out the product as one of the main drivers of its subscription and services revenue.
The increase in Cash Card transactions is a great sign for Square's ability to monetize Cash App. Competitors such as PayPal's (PYPL +1.25%) Venmo have struggled to monetize their peer-to-peer payments apps. Square collects a small charge every time a user swipes their Cash Card. It's no wonder Venmo moved to copy the product earlier this year.
Image source: Square.
A new focus for Cash App
Late last year, the focus for Cash App switched from peer-to-peer payments to financial services for the underbanked. The ability to receive deposits and store money are key new features to Cash App.
But the Cash Card is what makes it all work.
An account to receive and store money isn't all that useful if you can't use the money to shop or pay your bills. Venmo has been working on offering the ability to pay merchants with the money stored in users' accounts for years. It finally settled on copying its parent company's model last year, but it never considered simply issuing a physical debit card until after Square's product took off. Perhaps the solution was more obvious to Square, which helps merchants accept card payments as its core business.
Square has taken steps to make the Cash App and Cash Card a more integral part of its product ecosystem. It integrated Cash App with Caviar -- its food delivery business -- to enable its couriers to receive payment instantly. With the Cash Card, they can spend that money instantly too (paying for gasoline, for instance), so there's never a cash flow problem. The Cash App also allows employees to receive payroll deposits from Square merchants.
Overall, the Cash Card makes the Cash App a much more useful product, particularly for the underbanked.
The next steps for Cash Card
In May, Square rolled out Cash Boosts, a reward program that offers cash back on Cash Card purchases made at certain merchants. Boosts are designed to encourage users to use the Cash Card as a primary spending tool. CEO Jack Dorsey compared Boosts to credit card rewards programs, which give customers points or cash back every time they use their card in order to encourage more use.
Square is currently footing the bill on Boosts, even though some offers are for specific merchants. It's easy to see the program being used as a marketing tool for merchants at some point in the future, as several banks and credit card issuers have similar programs.
In the meantime, the additional Cash Card usage is supplying Square with lots of data it can use to inform its product decisions. One such product could be a consumer-loan product, which could turn the Cash Card into something more like a credit card.
Square Capital -- Square's business-lending arm -- is one of Square's most successful products ever. The company is able to make lending decisions because it has granular data on its merchants' sales. Offering a consumer loan product could be just as successful, but Square first needs to gather enough consumer data to make good lending decisions. PayPal was able to grow a consumer loans business because of all the consumer data from its users shopping online. Increased Cash Card usage is the key to unlocking the data Square needs for consumer loans.
So, while Square's Cash Card is apparently generating enough revenue make a significant contribution to the company's subscription and services segment, there's a whole lot of potential left for it to turn into a real revenue and profit source in the future.
