Square Inc. (NYSE: SQ) has quickly grown into one of the largest payment processing companies in the United States. Since its November 2015 IPO, Square has expanded its business model beyond payment processing to include scheduling, employee management and business analytics. As a part of its growing clout in the financial technology, or fintech, industry, Square launched a peer-to-peer (P2P) payment service in 2013 called Square Cash. The Cash App, a P2P platform made by Square, has been downloaded 33.5 million times as of Aug. 2018.

Square Inc. released Q3 2018 earnings on Nov. 7, 2018. The peer-to-peer payment processor reported $431 million in revenues this quarter, a 68% increase from $257 million over the same period last year. Here's how the company makes money. 

Who Are Square's Competitors?

The United States' fintech industry is dominated by PayPal Inc. (PYPL), PayPal-owned Venmo, Facebook Inc. (FB), Alphabet Inc. (NASDAQ: GOOG), Apple Inc. (AAPL), Amazon.com Inc. (AMZN) and Square, each of which has launched a P2P payment service in the last decade. P2P payment apps allow consumers to pay for goods and services goods and services, pay bills and transfer money, all from the convenience of their smartphone.

The stated goal of the P2P industry is to reduce transaction costs for consumers and businesses while making payments more social and efficient. In practice, that means users should be able to send money to their friends and family for free or be able to buy groceries at the store using their smartphone if they forget their wallet.

How Does Square Cash Work?

Square Cash does all the above and works with both businesses and individuals through an app available for both Android and iOS devices. After linking a debit card to the app, individuals and businesses can begin sending and receiving money to other users of the Square App. One of the key differences between Square Cash and its competitors is that Square Cash moves money in and out of a users’ debit card account directly, instead of keeping cash in an account through the service provider.

For example, when someone sends money from one PayPal account to another, that money stays inside the recipients’ PayPal account until it's transferred to their bank account. With Square Cash, the same transaction will see the money go directly to the bank account that they have linked to Square Cash. Square Cash claims that this process is completed instantly, but anecdotally it often takes one to two business days. Unlike other P2P service providers, Square Cash works exclusively with debit card accounts and cannot connect to a user's bank account or credit card.

How Does Square Cash Make Money?

One of Square's main selling points is that its P2P service is free for individuals, but the company has to fund those money transfers somehow. Square makes most of its money by charging businesses transaction fees for using its software, although individuals can also expedite deposits into their banks through a 1% transaction fee.

For businesses that accept Square payments, fees start at 2.75% per swiped transaction and 3.5% plus 15 cents for manually entered transactions. The company also sells additional services to companies at various rates, including a loyalty program, payroll and email marketing. Square allows payments to be made in up to 25 different currencies, though it is unclear if it charges any fees for foreign currency transactions and exchanges. It is important to note that this fee schedule existed before Square Cash launched and is not a part of the service’s website.

Square Inc. does not report separate earnings for Square Cash, meaning it is difficult to tell how much money that service contributes to the company's quarterly revenues. As an integral part of Square’s rapidly growing business, however, Square Cash has become a leader in the P2P payments ecosystem. More than $22.5 billion moves through the app each quarter, a figure that is only expected to grow as the app continues to expand its range of free P2P services.