Square's (NYSE: SQ) Cash App has grown to become a meaningful contributor to the company's top-line growth. The peer-to-peer payments app turned financial multitool is the No. 1 driver of its subscription and services segment, management said at the J.P. Morgan Global Technology, Media and Communications Conference.
During that conference, CFO Amrita Ahuja noted the company's per-customer acquisition cost for Cash App is about $20. That's actually quite low relative to other financial services, and even compared to other apps. Banks give out bonuses worth hundreds of dollars for customers willing to open a new checking account or credit card. Uber Technologies (NYSE: UBER) spent $3.2 billion on sales and marketing last year to grow active consumers by 23 million -- $137 each -- although some of that marketing spend goes toward attracting drivers, too.
Not only is Square attracting consumers at a relatively low price, but it's also growing quickly. The number of users doubled in 2018, reaching 15 million by the end of the year. If Square can continue attracting users at this rate -- in terms of both growth and acquisition cost -- it should be able to make a strong profit off the app's users in the long run.
Image source: Square.
Bigger than a network effect
Cash App benefits from the network effect, since it becomes more useful as a peer-to-peer payments service when more people sign up and use the service. As a result, it can offer a small incentive for its current users to advocate the app. It currently offers $5 to both new users and the people who referred them.
By comparison, PayPal's (NASDAQ: PYPL) Venmo doesn't offer a referral credit at all, and it's managed to reach 40 million users over the last twelve months. But the Uber app, which actually has a negative network effect (more consumers produce more demand, leading to higher prices), pays out $20 for new users and their referrers.
Square is also using things like Cash Card boosts to attract users to its app. Boosts offer instant cash back on purchases made with the Cash App-linked debit card at certain retailers. That cash back currently comes out of Square's pockets, but it could become a source of revenue in the future.
But Square has also seen strong adoption of Cash App for its features beyond peer-to-peer payments. By connecting Cash App to Square's merchant ecosystem, Square has been able to grow the service rapidly and efficiently. CEO Jack Dorsey noted during the company's fourth-quarter earnings call that "on Fridays of weeks inside the United States ... we do see a huge surge in downloads because of payday."
Square has built Cash App into its ecosystem of services, enabling it to drive downloads. Increasing its value as part of the Square ecosystem will keep download rates strong.
A path to profit
Square has aspirations for Cash App to eventually be able to replicate most of the services of a traditional bank. The company's target audience for Cash App: underbanked consumers, who currently pay exorbitant fees for financial services like cashing a check or sending money to a loved one -- and who have to wait in long lines on top of that.
There's a big opportunity to serve that segment at a reasonable price point (and with no lines). PayPal's management sees a similar opportunity, and it's working to improve Venmo's functionality to a level comparable with Cash App.
Square will continue to add features that provide monetization opportunities and add utility to Cash App. Improved utility of the app should enable the company to maintain its low customer acquisition costs, while increasing its average revenue per user. Maximizing that gap will lead to a highly profitable business over the long term, and Square's results so far are very promising.
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