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3 Factors Driving Square's Cash App Profits

By Adam Levy - Updated May 14, 2021 at 9:09AM

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Management will keep investing to nurture all of them.

Cash App generated more gross profit for Square (SQ -0.76%) than its Seller business in the first quarter. That's not to say Square's Seller segment is struggling to grow. The fintech company's original business increased gross profit 32% year over year last quarter, accelerating meaningfully as the economy reopens. But Cash App gross profits came in at $495 million, growing 171% year over year.

Square's management highlighted three factors leading to Cash App's profits.

Hand holding a black debit card next to a Square card reader.

Square's Cash Card. Image source: Square.

Greater inflows

Square saw more money flow into Cash App in the first quarter than ever before. One of the big focuses for Square in 2021 is to get more people using direct deposit on Cash App.

It often experiences a surge of inflows around tax refund season, and it saw a substantial bump from government stimulus checks in the first quarter. Management said it saw a 55% increase in inflows in March versus February as people received their stimulus check via Cash App.

That bodes well for the future, as users may be more likely to use the direct deposit feature on their tax return or their regular paycheck after they've used it once. Square leaned into the trend it saw around tax refunds earlier this year with the purchase of Credit Karma Tax, which should boost adoption of direct deposit for tax refunds.

Not only is Square experiencing greater inflows, particularly around direct deposit, but it's also seeing people use those inflows across the app. "During these periods of elevated inflows, customers have found greater utility in our ecosystem and adopted more products, which we believe will ultimately drive more inflows into Cash App longer term," CFO Amrita Ahuja said on Square's first-quarter earnings call.

Inflows did fall back down in April, declining 16% versus March. But the ongoing trend is more users bringing more of their money into Cash App and using multiple products.

Greater engagement

As mentioned above, the greater inflows have led to wider adoption across the Cash App ecosystem, and users are coming back to Cash App more often throughout the month. Ahuja noted Cash App users transacted 18 times per month on average across the ecosystem.

Cash Card continues to be a big engagement driver. Square counts 10 million of Cash App's 36 million users as monthly Cash Card users. Seven million of them use the card in any given week. Management once again highlighted the value of Cash Card and Boosts as an entry point to Cash App's broader ecosystem.

Overall, transactions per customer increased 40% year over year in the first quarter. Ahuja says the increase in transactions is "an indication of the investments that we make to make our customers aware of the broader product ecosystem." As such, she says the company will invest more in those efforts. She raised the outlook for operating expenses for 2021 by $200 million, but noted that number also includes investments in TIDAL, which it acquired majority ownership of last quarter. 

Connecting the ecosystems

Square has largely built Cash App and its Seller ecosystems separately, but CEO Jack Dorsey often points out that everything built for one ecosystem is easily implemented in the other. Ultimately, this interoperability will lead to opportunities to connect the two ecosystems, which is a key piece of Square's strategy to grow its business.

Last quarter, Square introduced Square Loyalty in Cash App. Square Loyalty allows Square sellers to easily implement a loyalty program, and by integrating it with Cash App, Square can make it more accessible for customers and drive user growth from Cash App.

Square has made a couple other integrations across its ecosystems before. Last year, it launched On-Demand Pay and Instant Payments. The former allows employees of Square sellers to receive a cash advance on their paycheck, and the latter allows them to receive funds the same day management sends them.

There are many other potential avenues of integration. "We're gonna continue to look for opportunities here. There's a ton," Dorsey said during the call. He also mentioned the opportunity to make connections between the TIDAL ecosystem and Cash App or the Seller business.

Growing these integrations will boost customer adoption of multiple products, leading to increased engagement and greater inflows. Indeed, all three factors build on each other, and the company's investing to keep them growing. As such, Square's booming gross profit may only translate into modest earnings growth for the fintech stock for the time being as management focuses on the long-term potential of its products.

Adam Levy has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Square. The Motley Fool has a disclosure policy.

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