2019 was another good year for Square's (SQ -0.28%) peer-to-peer payments app. Management reported that Cash App had 24 million active users in the month of December, and the consumer app generated $1.11 billion in net revenue during 2019. Even when you remove bitcoin sales, Cash App brought in a robust $589 million during 2019 and exited the year at a run rate over $700 million.

Square's ability to monetize and grow Cash App compares favorably to its next-closest competitor, PayPal's (PYPL 0.33%) Venmo. PayPal said it ended the year with 52 million active Venmo users, more than twice as many as Square, but its revenue run rate was just $450 million.

Square's ability to innovate and engage its users is propelling strong growth in both users and monetization. That trend ought to continue in 2020 as management noted increased daily engagement among users, particularly those using newer features such as Invest.

A person holding a smartphone displaying the Cash App

Image source: Square.

Growing engagement, retention, and monetization

Cash App's 24 million monthly active users in December represent a 60% year-over-year increase in active accounts on the platform. That's faster relative growth than the 30% increase Venmo has seen since the end of its first quarter, but the 9 million net additions over the past year are actually fewer than the 12 million net new accounts Venmo added in the previous nine months.

Still, Square has seen significant improvements in daily engagement over the last year as well. Management said daily usage increased 80% versus the 60% increase in monthly usage. One factor driving that improved engagement may be the redesign the company rolled out last quarter. The redesign made it easier for users to discover everything Cash App has to offer, including Cash Card and bitcoin and stock investing. 

As consumers use more features in Cash App, they tend to open the app more often and use the app for longer periods of time. Square has seen a similar characteristic among merchants that take more than one of its products. Consumers using multiple features in Cash App also opens the door for new monetization avenues. 

Square is taking a conservative approach to monetization -- bitcoin and stock investing are practically free for consumers -- mainly looking to drive engagement and customer acquisition. Nonetheless, it's done a good job improving its user monetization, which reached an annual run rate of $30 per user in December compared to just $15 per user two years ago. That growth was driven primarily by increased Cash Card transactions.

Growing the business in 2020

Square's primary focus for Cash App is growing the network. At just 24 million users, there's still a lot of potential to grow active accounts on the platform.

"Our focus today, first and foremost, is to continue to scale this business and get it in the hands of more customers with even more product functionality," CFO Amrita Ahuja told investors on the company's fourth-quarter earnings call.

However, that doesn't mean a slowdown in overall revenue growth or improvements in revenue per user. Nor does it mean a reduction in gross margin for Cash App, which contributed 27% of the gross profit for the overall business in 2019.

Some of Square's biggest marketing expenses for Cash App have strong potential to turn into sources of revenue. Last year, it started partnering with businesses on Cash Card Boosts, which offer instant cash back on purchases made at select retailers. Instead of Square paying out that cash, the partners pay it out. So, what was once a loss leader to get customers to use the Cash Card is now a source of revenue, or at least not contra-revenue. The company has also found ways to reduce the net costs of Boosts, including requiring a certain number of purchases before unlocking a Boost or putting an expiration date on a Boost.

There's similar potential for Square to turn Investing, which offers free fractional-share trading in the app, into a source of revenue instead of just a customer acquisition channel. The company could offer more advanced features to consumers interested in options investing and using leverage. Competitors in the space, such as Robinhood, use a similar monetization strategy.

Even still, there's plenty of room to improve monetization using Cash Card. Management said just 20% of Cash App users have the Cash Card in their wallets. Despite the small attach rate, the card is one of Cash App's biggest sources of revenue. That makes it one of the best and fastest ways to increase revenue per user. Ahuja is optimistic about the potential to continue improving the attach rate in 2020.

Cash App is a billion-dollar business and a significant contributor of gross profit for Square. Ahuja expects gross profit to grow more on an absolute basis for Cash App in 2020 than in 2019, suggesting about $250 million in incremental gross profit. That's about 40% of her outlook for the total increase in Square's gross profit in 2020, indicating how important the consumer app has become to the overall business. Investors will want to pay close attention to the progress of this peer-to-peer payments app.