More and more Cash App users are relying on Square's (SQ -3.51%) app for their banking needs. Direct deposit accounts surged in April after Square made efforts to make the feature more available to users ahead of tax refund season. By mid-April, 14 million Cash App users were eligible to receive direct deposits.

The CARES Act stimulus provided an even bigger boost to Square's latest Cash App focus. Direct deposit volume tripled in April compared to March. Management notes direct deposit customers remain a small portion of the Cash App's overall network, but recent adoption is encouraging.

Direct deposit accounts and volume are key metrics for Square investors to follow, says SunTrust analyst Andrew Jeffrey. He sees Cash App taking a 20% deposit share as it competes with traditional banks.

Growing direct deposit accounts on the Cash App open the door for more services, and the company already sees a positive correlation between users who set up direct deposits and revenue. "Direct deposit customers have generated revenue which is multiples higher compared to customers who only use peer-to-peer," CFO Amrita Ahuja said during Square's first quarter earnings call in May.

A person holding a phone displaying Cash App.

Image source: Square.

Building a bank from an app

In March, Square received federal and state (Utah) conditional approval for an industrial loan bank charter. Square plans to open a bank in Utah next year in order to offer small business loans directly through its Square Capital product as well as deposit products.

It also opens the door for consumer loans, an area Square has explored from its Seller ecosystem, and it'd enable Square to accelerate the availability of direct deposit features in the Cash App. 

Square's still in the early days of growing direct deposits in the Cash App. The feature is only available to 14 million users. As of December, Cash App had 24 million monthly active users. That number's likely grown considering Cash App's strong results in the first four months of the year.

Growing direct deposits drive an increase in stored funds in Cash App. Square said it had $1.3 billion on deposit from Cash App users as of the end of April. Ultimately, increasing deposit volume increases volume in Cash App's other services.

A leading indicator of revenue

As mentioned, Square generates far more revenue from Cash App users who use its direct deposit feature than from those who merely use it to send payments to friends. Storing funds in the Cash App can encourage users to use the app's Cash Card or Investing features.

As such, deposit accounts and volume are key indicators of the revenue growth and potential of Cash App services. With the spike in funds stored in Cash App, investors in the fintech company should look for growth in the app's subscription and services revenue in the second quarter.

There may be other revenue-generating features Square has yet to build out in the Cash App, with the company ultimately seeking to replace a traditional bank account entirely. Giving users more ways to use their funds will provide revenue growth and further encourage deposits. 

Square's made no commitments to sharing deposit account data with investors. As such, management may only provide updates when it reaches a new milestone or it has good news to share.