Square's (NYSE:SQ) Cash App started as just another way to send friends money, like PayPal Holdings(NASDAQ:PYPL) Venmo. But as it added more features, it broadened its appeal. And last month, downloads of Cash App surpassed those of Venmo, a milestone that's a testament to the momentum Square has created around the app.

Cumulative Cash App downloads totaled 33.5 million as of the end of July, compared with 32.9 million for Venmo, according to data from SensorTower and Nomura Instinet. Cash App downloads grew three times faster than Venmo downloads last month.

Square built that momentum by adding services to Cash App that have clear monetization capabilities. Meanwhile, PayPal has struggled to balance monetization with maintaining its user experience and, by extension, its user base. Square's risk-taking (if you can call it that) has paid off handsomely.

A person using Cash App.

Image source: Square.

A totally different Cash App

Just a couple of years ago, Cash App (then known as Square Cash), was just another peer-to-peer payments app. It's main advantage was that it settled transactions quickly, with money often showing up in users' bank accounts the next day.

Since then, however, Square has moved Cash App away from quickly settled peer-to-peer transactions. It turns out, most users don't care how quickly they can get their money, and for those who do, there's now a better option with Zelle.

Square has since focused Cash App on financial services, particularly for the underbanked. It added the ability to store money in a virtual account (and did away with automatic next-day transfers). It gave users a virtual routing and account number to receive direct deposits. It gave them a debit card. And it gave them the option to store their money in bitcoin instead of U.S. dollars. Cash App has fully transformed itself into a different beast from the peer-to-peer payments app it once was.

Meanwhile, Venmo hasn't expanded much beyond its core peer-to-peer payments service. It started rolling out Pay With Venmo, which is basically a mobile-focused version of PayPal's core payments product. After Square found success with the Cash Card, the debit card linked to Cash App, Venmo followed suit as well. But Venmo is still focused on peer-to-peer payments with a bit of a social bent.

It turns out that offering easy and simple access to financial tools is a much stronger driver than a network of peers using a payments app. As a result, Cash App has now caught up to Venmo in total downloads over the last year.

Real monetization potential

As mentioned, PayPal continues to struggle with monetizing Venmo. PayPal's reported transaction take rate (the percentage of payments it keeps) fell to 2.77% last quarter. Take rate is hurt by peer-to-peer payments, because PayPal doesn't typically keep any of that money.

The vast majority of PayPal's transaction revenue comes from business-to-consumer transactions. That's why PayPal is trying to increase Venmo users' interactions with businesses through products like Pay With Venmo.

Square's path with Cash App offers much better monetization potential. The company already reported $420,000 in profits from selling bitcoin last quarter. That number might go up since Square switched to private brokers for buying and selling bitcoin and expanded bitcoin buying and selling to all 50 states.

Cash Card also provides great monetization capabilities. Square takes a small fee for every swipe, like other bank-backed payment cards. Management even called out this revenue as a driver in its subscription and services revenue for the first time last quarter. Cash Card also presents a marketing opportunity with Cash Boosts, a cash-back rewards program that Square rolled out in May.

Most important of all, Square is positioning Cash App as the center of many users' financial lives. That gives it a lot of data that it can use to improve its products for merchants and to create new products on both the merchant and consumer side. CFO Sarah Friar has already hinted that Cash App could be the basis for a consumer loan product similar to Square Capital, its business lending product.

While PayPal has been stuck in its old ways of thinking with Venmo, Square has found a way to serve customers whom the financial industry mostly ignores, and to provide them with real value. That's why it has seen such strong momentum with downloads. That momentum, combined with the product's sudden spike in monetization capabilities, is a strong catalyst for growth at Square.

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