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Square's Cash App Doubled Its User Base in 2018

By Adam Levy - Updated May 17, 2019 at 2:03PM

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Here's how it did it and what the future might hold for the peer-to-peer payments app.

As part of Square's (SQ -4.25%) fourth-quarter earnings report, the company noted Cash App -- its peer-to-peer payments app -- reached 15 million monthly active accounts last year. That's more than double the 7 million accounts Cash App ended 2017 with.

Square has also shown progress in monetizing those users. While it didn't disclose any specifics, Cash Card -- the prepaid debit card linked to Cash App -- moved up the list of revenue growth contributors for Square's subscription and services revenue last quarter. For context, PayPal (PYPL -0.91%) disclosed that Venmo reached a $200 million revenue run rate at the end of 2018.

During Square's fourth-quarter earnings call, management went into further detail on what's driving account growth and how monetization could progress from here.

A phone displaying the Cash App and the Cash Card.

Image source: Square.

The network effect in full force

The biggest growth driver of Cash App is still the original peer-to-peer network it's building. When someone wants to send money to a contact using Cash App, that contact needs to download the app and sign up.

"The biggest driver of growth for us is the product itself has inherent network effects," CEO Jack Dorsey explained on the earnings call. "You can see this yourself on Fridays of weeks inside the United States where we do see a huge surge in downloads because of payday. And people are utilizing the money they have in Cash App to send friends, families, landlords, causing another download and another."

The network effect, by its nature, has an exponential impact on growth. Each new person that signs up becomes an advocate for Cash App. As a result, it can drive substantial account growth.

That said, Venmo is also growing largely thanks to the network effect. Since Venmo got a head start on Cash App, Square needs to overcome the competitor's network effect by providing a better value proposition.

Check out the latest earnings call transcript for Square.

Offering more value

Square gave Cash App users more reasons to choose its app over competitors in 2018 by adding several new features.

At the start of the year, Square opened bitcoin trading to nearly all Cash App users. The move proved relatively popular. Square generated $166.5 million in bitcoin revenue in 2018 and managed to profit $1.7 million.

In March, Square added ACH direct deposits for paychecks. That may be why Dorsey noted an uptick in downloads on Fridays. Square has also integrated its merchants' payroll service with Cash App as well as giving contractors working for Caviar -- its food delivery service -- the option to receive funds faster via Cash App. Those efforts mean more people are storing cash in their Cash App accounts, making it a more convenient way to send money to whomever they need to.

In May, Square launched Boosts for the Cash Card. Boosts offer instant cash back on purchases made at certain retailers and restaurants when using the Cash Card. While Venmo has copied Square's Cash Card, it hasn't gone so far as to offer a rewards program for using the card. Square is currently paying for Boosts out of its own pocket, considering it a marketing expense.

All of these services are aimed at growing the user base on Cash App. Bitcoin trading is the only feature that makes any profits at all, and they're extremely thin. Still, it's hard to argue with doubling the user base in a year.

What 2019 may bring

Square will look to continue driving utility in Cash App in 2019. Former CFO Sarah Friar has said she thinks Cash App could replace a bank account for many users. Adding new features is the key to the app's continued growth, so here's what investors might look for in 2019.

  • A linked high-interest savings account. If Square really wants to get people to store money in the app, a savings account with a relatively high interest rate will do it. Square reapplied for a bank charter late last year, which would enable it to quickly expand its banking services.
  • A full-fledged investment product. Square could expand beyond bitcoin to more traditional securities, offering free trades like some of its competitors.
  • More Boosts. Square could expand Boosts by launching it as an advertising product. Dorsey hinted at that possibility, noting on the earnings call, "We think there's a lot of incentive both for consumers and also our seller partners on it." Friar previously expressed that the end goal of Boosts is to be an advertising product.

Square's new CFO is optimistic about the future development of the app. "We're just at the beginning of this opportunity. There will be future products and services and opportunities to build engagement which we can eventually monetize for the future."

That stands in stark contrast to PayPal's current strategy with Venmo. In a conference call after the company's fourth-quarter earnings release, CFO John Rainey told analysts, "Yes, there's opportunities for features that we don't have today. But our eye is on the ball here are with the three initiatives that we have." That may enable Square's Cash App to grow well past Venmo, if it hasn't already, and produce significantly more revenue in the long run.

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