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Square's Ready to Take On PayPal

By Adam Levy - Apr 6, 2021 at 11:31AM

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Square is working on a new payment option for online shoppers.

In case you missed it, Square (SQ -4.25%) in December launched a streetwear collection based on its Cash App brand. No, this financial services and digital payments company isn't suddenly pivoting into the apparel business. Instead, the "Cash by Cash App" store served as a demonstration of a much-bigger opportunity for Square.

The online store features a big button at checkout encouraging shoppers to check out with Cash App. And Square has plans to expand that checkout button to more online merchants, taking on PayPal Holdings' (PYPL -0.91%) core business.

What Square's working on

A couple of job listings for Square indicate it wants to expand the checkout feature in some form. "The Commerce team is building new retail payment experiences on Cash App that leverage our vast omnichannel Seller ecosystem at Square," job listings for a software engineer and engineering manager explain. 

A toy shopping cart sitting on top of a laptop's keyboard.

Image source: Getty Images.

Square revamped its online store product a couple of years ago following the acquisition of Weebly, and it's seen strong growth since. Management said online channel gross payment volume, or GPV, has grown greater than 50% in each of the past two years. Additionally, omnichannel merchants (a category that combines online and in-store sales) now account for the majority of Square's GPV, following the shift in consumer behavior during the pandemic.

A big advantage PayPal has over start-ups is that it's already developed a massive network of both merchants and customers, and both groups trust PayPal with their payment information. But now Square finds itself with a sizable base of merchants using its online store and 36 million Cash App users. There's a real opportunity to connect the two ecosystems.

"[Y]ou can imagine where it might go as we make it even faster, we make it even easier," CEO Jack Dorsey said of the Cash by Cash App experiment during Square's fourth-quarter earnings call. "And I think it draws both on the Cash App ecosystem and as acquisition opportunities there and also for the Seller ecosystem and has an opportunity there."

Customer acquisition will be the prime area of focus for Square's $850 million in incremental operating expenses this year. The current per-customer acquisition cost for Cash App is less than $5, management said. Increasing that and re-engaging the 50 million Cash App users not actively using the service could go a long way toward catching up with PayPal. As of the end of 2020, PayPal counted nearly 350 million active consumer accounts.

Bringing the option in-store

If Square can get more merchants and customers used to the idea of using Cash App to pay businesses, there's potential for Square to bring the same concept into brick-and-mortar stores. That's a big area of interest for PayPal, which has pushed QR codes and other in-store digital payment options over the last year. But Square already has the in-store merchant relations to lean on.

To be clear, there's no indication Square's working on in-store payments with Cash App.

But as both sides of the network continue to grow, it seems like only a matter of time before Square will work on a project to provide faster and lower-cost in-store payments with Cash App.

"I think both Cash App and the Seller business have an opportunity to strengthen each other. And we're showing that off a little bit with Cash by Cash App, but there's a lot more to come," Dorsey said on the fourth-quarter call.

A big opportunity for Square's bottom line

Investors shouldn't overlook the opportunity for Cash App payments to merchants. Using the Cash App instead of processing a payment card allows Square to bypass the payment networks, saving nearly all of its costs of processing payments. Square requires Cash App users to load their digital wallet with a bank transfer, debit card, or direct deposit. All three have much lower costs than processing a credit card as PayPal does for most payments.

That's an opportunity for Square to keep more of each payment for itself and help its merchants save on processing fees as well. More profitable payment processing for Square, less expensive processing for sellers, and more convenient payment options for consumers is a win-win-win.

And Square is well-positioned to drive adoption of any new payment service it launches thanks to Boost, which it's been using to promote more and more Cash App features. Boost gives rebates to users for performing certain actions within Cash App like using the Cash Card at certain merchants or making a direct deposit.

Square is gearing up to take on PayPal's core business. It has a lot of the pieces in place and the money to spend to take on the fintech giant.

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