Square (SQ 4.83%) has seen Cash App, its peer-to-peer payments app, grow to become a considerable part of its business. Last quarter, the app accounted for more than 25% of its revenue, and it's on a path to profitability as soon as next year.

Square's success with Cash App has outshined PayPal's (PYPL 0.33%) success with Venmo. Now it looks like Cash App is encroaching on markets where Venmo has built strong footholds, potentially stealing users away or splitting their allegiances. "Our analysis of Google Trends searches for 'Cash App' vs. 'Venmo' shows that Cash App is garnering increased attention in traditional Venmo strongholds like New York, California, or Massachusetts," Macquarie analyst Dan Dolev says.

With plans to invest more in marketing and expanding the features of Cash App over the next year, Square's next year of gains could come at the expense of Venmo's growth.

A person holding a smartphone that's displaying Cash App

Image source: Square.

Cutting into Venmo's territory

So far, both Cash App and Venmo have grown in relatively greenfield markets. Both have seen their growth fueled by the network effect due to the peer-to-peer focus of the apps. As a result, they've largely carved out unique user bases: Venmo on the coasts, and Square in the South and Midwest.

However, Square is successfully cutting into Venmo's user base through marketing efforts and introducing enticing new features. In fact, Square considers some of its new features to be customer acquisition tools. It rolled out Boosts to everyone last year, offering instant cash back for purchases made with the Cash Card. 

Most recently, it introduced commission-free stock trading in Cash App, a feature it calls Investing. CFO Amrita Ahuja explained on Square's third-quarter earnings call:

We really view this product set to be an engagement driver for us as we mentioned earlier, to help build out the network, and to help bring discoverability and daily utility to the app that enable growth for other revenue streams within the app.

The idea is that the increased utility in the Cash App will allow Square to attract new user demographics and possibly steal users from other apps, including Venmo or Robinhood -- a free stock-trading app. Venmo has fought back by copying key features from Cash App, which could help retain existing users, but it won't help attract new users like Square's efforts to innovate in the space.

It appears Square's efforts are starting to pay off. As mentioned, Dolev found increased interest in Cash App in markets historically dominated by Venmo. That's a sign that Square's winning over new users -- and converting some of Venmo's. The last updates each company provided saw Cash App with just 15 million users to Venmo's 40 million. So, there's a lot of room for Square to grow.

Another year of strong revenue growth ahead

Square disclosed that Cash App revenue increased 115% in the third quarter, and Dolev says management's guidance implies about 45% growth next year. He thinks that might be conservative and says 65% growth is possible for the digital payments apps.

There are several factors fueling revenue growth at Square. First is the continued adoption of Cash Card. Cash Card gives users instant access to their Cash App funds anywhere, and Square collects an interchange fee every time a user swipes the card.

Cash Card cannibalizes Cash App's biggest source of revenue, Instant Deposit, which allows users to transfer funds from Cash App to their bank account instantly instead of waiting the standard one to three business days. 

Square can grow revenue from its existing users base as well as attract new users through new Cash App features. For example, users who trade bitcoin in Cash App are twice as likely to use Cash Card, according to Ahuja.

There's also strong potential for Square to turn these money-losing features such as Boost and Investing into sources of revenue. Boost has the potential to become an advertising product for merchants, and Square could charge users for premium investing features, similar to Robinhood. Monetizing those features could provide a meaningful source of new revenue for Square, propelling it well beyond its current outlook. That said, it might look to invest in other areas before focusing on monetizing those features.

Overall, Cash App appears set for a great 2020 after becoming a meaningful contributor to Square's growth this year. PayPal investors may see growth at Venmo slow as users split allegiances with Cash App and new user growth becomes more difficult to achieve.