In Square's (NYSE:SQ) most recent product announcement for Cash App Pay, the fintech provided a small detail about Cash App's user base. "Square sellers will also be able to better reach Cash App's more than 70 million annual transacting active customers," it said in a press release.

Square previously kept its reporting on Cash App to monthly active users. Rival Venmo, owned by PayPal (NASDAQ:PYPL), uses the metric of annual customers, and PayPal's latest Venmo update said it had more than 75 million active users. That means Cash App is within striking distance of overtaking Venmo.

A person inserting a black debit card into a Square card reader.

Cash App's Cash Card. Image source: Square.

Bigger ... and more profitable?

It's important to note Venmo had a big head start on Cash App, launching in 2009 versus 2013. And the first-mover advantage is significant for these peer-to-peer network apps.

Cash App has been able to catch up by offering new products and features. Venmo has copied nearly everything Cash App offers, but it hasn't kept up with Square's pace of innovation.

Not only has Square's expanding suite of services within Cash App drawn in new users, it has also helped generate a significant amount of revenue for the company. Over the last four quarters, Cash App generated $1.8 billion in gross profit. By comparison, PayPal expects Venmo to generate half that amount in revenue (so even less in gross profit) for full-year 2021.

Cash Card is the main revenue driver for Cash App. Not only does Square take a small percentage on each transaction made with the prepaid debit card, Cash Card users are also twice as likely to adopt other Cash App products than non-cardholders. The flow of cash into Square's platform "[has] been a primary driver of Cash App gross profit."

Meanwhile, Venmo generates the bulk of its revenue when users transfer money from their Venmo account to an eligible bank account or debit card. These Instant Transfers represent money flowing out of the Venmo ecosystem. Thus, it appears Cash App is creating more sustainable revenue growth, and it should continue to outpace Venmo's revenue per user.

Room to keep growing

Another takeaway from Square's disclosure is the fact there's still a lot of room for Cash App to grow its active user base. Its second-quarter letter to shareholders said Cash App had 40 million monthly active users.

In other words, less than 60% of people who used Cash App in the last year have used it in the last month. That presents a massive opportunity for Square to improve engagement among users that only open the app on a few occasions.

And all indications are that it's already doing that. Square said it saw about two-thirds of monthly users transact on a weekly basis in June. That share has steadily increased since 2017, it says. It's likely the monthly-to-yearly ratio of active users has been improving simultaneously as the ecosystem expands.

Continuing to improve the ratio of monthly actives to yearly actives is low-hanging fruit for the company. It's much easier to reengage an existing user than it is to get a new user to sign up for a service. And Square is particularly good at getting its users to try multiple products across its ecosystem by using each one to incentivize adoption of the others. The more products a user tries, the more likely they are to stay engaged and the more revenue they generate for Square.

So not only is Cash App rapidly catching up to Venmo in terms of users, it should also draw even more engagement and revenue from those users than Venmo, leading to stronger long-term results for the 12-year-old fintech company.

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