Square (SQ -1.57%) introduced a new program in the Cash App a few months ago called Cash Boost. Boost acts as a loyalty program for using Square's new Cash Card -- a prepaid debit card tied to users' account balances in the Cash App. Every time a Cash Card holder uses the card at designated stores and restaurants, they can earn cash back by using a Boost.

For now, Square is footing the bill on that cash back, whether it's $1 on a morning coffee run or 10% off at a favorite lunch spot. The company writes it off as a marketing expense to increase adoption and usage of the Cash Card. Long term, however, Square has its sights set on turning Boost from an expense to a source of revenue.

"You can imagine a situation over time where that becomes more of an ad platform for the businesses that are sitting in Boost," CFO Sarah Friar said at a recent investor conference. "Over time our expectation is that if we can prove efficacy, then companies will pay for it. It'll be no different than buying Adwords on Google."

Adwords is the core advertising product for Alphabet's (GOOG 0.74%) (GOOGL 0.55%) search-engine business, relying on user behavior and other targeting data. I've written before about how Square is able to collect valuable user data that would be perfect for targeting advertisements, and it appears it's starting to take that next step.

The Square Cash App and Cash Card

Image source: Square.

Proving the product works

Unlike Google or Facebook (META -0.52%), Square is in a position to provide hard data about how well promotions like Boost work. If you listen to earnings calls for the big digital advertising companies, you'll constantly hear management talking about how their company is improving measurement. That is to say, they're improving how accurately they can estimate how much ads drove sales, and provide a good return on investment. Without the hard data, however, platforms like Google and Facebook will never be 100% accurate.

Square, on the other hand, can show businesses how much consumers were spending with the Cash Card at a certain business before it ran a promotion, and how much they spend after. While that won't be 100% attributable to the promotion -- since some users will change payment methods to take advantage of the Boost -- it's hard data Square can use to show the efficacy of the platform.

Things get even more interesting if Square approaches merchants that use its point-of-sale equipment to process payments. Square can provide unparalleled data on how Boost directly impacts a business's sales right down to the customer level.

Amazon has notably found success with its advertising platform thanks to controlling everything from the ad impression to the sale. Square may be able to find similar success thanks to its ability to track users from impression to sale, giving businesses an accurate measure of how effective their ad spending is.

Creating more targeted ads

While search history or what people "like" on Facebook or Instagram might provide some insight into people's interests, nothing speaks louder than how they spend their money. Knowing someone is interested in landscaping, for example, is one thing. Data showing that someone habitually spends money at home improvement stores indicates that person is more interested in do-it-yourself products than in a landscaping service.

With the data Square can collect from Cash Card users and Square merchants, it's well-positioned to target advertisements. Friar also points out it can use simple things like location data from people's phones, and other more generic targeting information, to make sure it shows the right ad to the right consumer at the right time.

Such a system could keep ad load relatively low and maximize the effectiveness of each ad. Inundating users with dozens of Boosts would lead to diminishing returns. Facebook has faced that reality lately with ads in its News Feed, as it's been relying heavily on the effectiveness of its advertising to drive revenue.

Playing into the ecosystem

If Square can get businesses to foot the bill for Boost, it's effectively getting paid to promote one of its most promising products -- the Cash Card. Management called out the growth of Cash Card as a meaningful source of revenue last quarter. The company collects a small fee every time someone swipes a Cash Card.

Cash Card, meanwhile, is linked to Cash App, to which Square is continually adding new banking services, including direct deposit and bitcoin purchasing.

As Square expands its ecosystem, adding more services and more reasons to use its products, it stands to keep customers more engaged. That provides significant revenue opportunities, including the chance to turn a growing expense into a stream of revenue.