Add tax preparation and filing to the list of financial services Square (SQ 1.82%) could offer through Cash App. The fintech company has agreed to acquire Credit Karma's tax preparation division for $50 million, contingent on Intuit's acquisition of the rest of Credit Karma's business. The tax prep business would fall under Square's Cash App.
Adding tax preparation services to Cash App could provide yet another on-ramp for new users, as well as a platform for Square to build a more robust tax service in the future.
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Expanding the ecosystem
Square's main strategy is to build out an ecosystem of services for both consumers and merchants. Within Cash App, its consumer app, it aims to offer everything a traditional bank offers and more. It most recently added small short-term loans to its offerings.
By providing a wide variety of services, Square's able to keep its prices low while raising the lifetime value. It's seen great progress on both the consumer and merchant sides of its business by following that strategy. Management says Cash App users that use two or more services produce three to four times more gross profit compared to those who only use peer-to-peer payment.
Square, like Credit Karma, can offer basic tax prep and filing for free. Square can use the data it gathers from its users' tax returns to cater its other products to their needs and develop new products.
It's worth noting many consumers qualify for free filing services anyway. Intuit has faced some controversy for promoting its paid tax prep services and obfuscating free options to customers that qualify for free filing.
Tax prep is also another way for Square to attract users to its platform. Promoting the service could help Cash App reach a demographic it doesn't currently with existing features. Combined with the additional data Square stands to glean from users' tax filings, it makes tax prep a good fit for Cash App.
Potential for a paid seller service
Building on Credit Karma's tax business in Cash App could open the door for Square to develop a tax service for small businesses within its seller ecosystem.
Square has a history of developing services in Cash App and then bringing them to its seller ecosystem. It followed that path with features like instant deposits and the Square Card. The ability to offer tax services makes sense for Square, which necessarily tracks most sales of a business.
In fact, business tax prep could be a service that encourages merchants to use Square for more payments processing services like its online payment service in order to import transactions more seamlessly. That would reinforce the ecosystem benefits Square's built over the years.
Just part of an investment
Square plans to invest an incremental $850 million next year on marketing, product, and customer support. About one-quarter of that will go toward developing new products, which means the $50 million Square could spend on Credit Karma Tax is just a small portion of its budget.
Investors should expect Square's continued investment to pressure its operating margin next year, but it's gaining the potential for tax prep to expand its user base, provide data to increase existing product adoption and develop new products, and provide a stepping stone for a profitable seller service.
It's also worth noting Square won't have time to integrate Credit Karma Tax into Cash App before the 2020 tax season even if it closes quickly. Investors likely won't see an impact from this acquisition until 2022. That gives it lots of time to work on making a good product.
