Cash App is a peer-to-peer (P2P) payment service owned by Square Inc. (NYSE: SQ), a major player in the financial technology (fintech) industry. Cash App is only a part of Square’s business, which is built on software and point-of-sale hardware for business of all sizes. Square has quickly grown into one of the largest payment processing companies in the United States. Since its Nov. 2015 IPO, the company has expanded its business model beyond payment processing to include scheduling, employee management, and business analytics.

Cash App is Square’s foray into fintech for individuals. Square launched the service in 2013 to compete with services like Paypal’s (PYPL) Venmo, Apple (AAPL) Pay, and Google (GOOGL) Pay. P2P payment apps allow consumers to use their smartphones to pay for goods and services, pay bills, and transfer money to friends and family. However, unlike its competitors, Cash App has expanded its functionality beyond just P2P, allowing users to also receive direct deposit payments and ACH payments, as well as purchase Bitcoin through the platform.

Despite intense competition in the P2P payment industry, the addition of Cash App has been great for Square. The company reported a billion dollar bump in revenue last year; $3.3 billion in 2018 compared to $2.2 billion in 2017. Incidentally, 2018 was also the year Cash App surpassed Venmo in downloads, with 33.5 million cumulative downloads, to take the number one spot on the App Store.

As of the beginning of 2019, when Square Inc. released its 10-K and annual report, it had a market capitalization of $31.93 billion. Square has a current ratio of 1.5 and a return on equity (ROE) of -5.01%.

The Business Model

Cash App is free to download and its core functions—making P2P payments and transferring funds to a bank account—are also free for individuals to use. Cash App makes money by charging both businesses to use the app and individual users transaction fees to access the app’s additional services.

Key Takeaways

  • Cash App is growing fast. In Aug. 2018, it unseated Venmo as the top financial app on the Apple App Store with 35.5 million downloads. It still holds the number one spot.
  • Cash App’s basic P2P service is free to use. It makes money by charging users and businesses various fees for using its additional services.
  • Users can buy and sell bitcoin with their Cash App balances. Cash App profits from facilitating these transfers.

Charging Businesses

Cash App charges businesses that accept Cash App payments 2.75% per transaction. Such payments can be made in two ways:

  • An individual makes an in-app P2P payment to a business.
  • An individual uses the Cash Card—a Visa prepaid card that users can order, which is linked to a their in-app balance—to pay a business.

Expedited Transfers and Credit Card Payments

For a 1.5% fee, individual users can expedite transfers from their Cash App account to a bank account. This allows the user have funds transferred into a bank account immediately instead of waiting the standard deposit time. Individuals can also use the platform to make personal payments using a credit card, instead of their Cash App balance, for a 3% transaction fee.

Bitcoin Exchange

At the end of 2017, Cash App started allowing users to use their in-app balances to buy and sell bitcoin. The app doesn’t charge individuals a fee for using this service, yet it is the only service Cash App provides that has been profitable to date. So the question is: how does Cash App make money with bitcoin? The answer: like any other bitcoin exchange. There is generally a 1-4% difference in what bitcoin exchanges and individuals pay for bitcoin. Cash App factors these differences into the prices it offers its users, thereby generating revenue on the exchanges it facilitates. 

For example, Cash App might buy a bitcoin from one user for $9,900 and sell it to another for $10,000, making $100 in revenue. Cash App calculates this price difference based on fluctuations in the value of bitcoin. This might not sound like much, but it adds up. According to Square’s annual report, Cash App generated $166.5 million in bitcoin revenue in 2018 and profited $1.7 million.

Future Plans

Cash App is in the right business. In a world where the smartphones are ubiquitous and nothing seems more important than convenience, consumers are increasingly looking to digital wallets. This means P2P payment apps are on the rise.

However, competition is intense. With its $32 billion market cap, Square is still a small fish compared to PayPal, which has a market cap of $112 billion. Cash App also has to compete with Apple Pay and Google Pay, apps that come pre-installed on iPhones and Android phones. So Cash App needs to do all it can to stand out, which means continuing to roll out exciting new features that attract new users and drive its rapid growth.

In the past year and a half, Cash App has introduced three popular new features:

  • The Cash Card, a free-to-get Visa debit card tied to the user’s in-app balance. Users can also withdraw funds from ATMs using this card—launched in May 2017.
  • Cash App’s bitcoin exchange—launched in Nov. 2017.
  • The Cash Boost feature; a series of discounts at coffee shops and chain restaurants, like Chipotle and Subway, exclusively accessible through the Cash Card—launched May 2018.

The Boost feature is particularly future-oriented and aims to keep users using their Cash Cards often. New “boosts,” which are announced through social media, are added regularly as Square acquires new partnerships with popular brands. This feed keeps users interested and engaged.

In Jan. 2019, Square launched a similar free debit card for businesses called Square Card.

Diving Deeper into Crypto

In February, Square’s CEO Jack Dorsey (also the CEO and co-founder of Twitter), announced that Cash App would soon support bitcoin’s Lightning Network. This network, which allows bitcoin transactions to be made almost instantaneously, has been called a “game-changing innovation” by Aurélien Menant—the founder and CEO of cryptocurrency exchange Gatecoin (CNBC). The exact date of this introduction has not been announced, but as Dorsey said on the Stephen Livera Podcast in February, “It’s not an ‘if,’ it’s a ‘when.’”

Not Yet Profitable, but Trends Look Good

According to its annual report, Square Inc. generated net losses of $38.5 million, $62.8 million, and $171.6 million in 2018, 2017, and 2016, respectively. This is a promising trend, considering Square’s three year price returns are at 670%. Square does not report separate earnings for its Cash App, making it difficult to tell how much money the app contributes to the company's quarterly revenues. However, judging by Cash App’s superlative performance in downloads, it’s doing just fine.

Furthermore, according to The Motley Fool, Cash App’s bitcoin platform is the only part of Square’s business that is consistently profitable.

Square reported $959 million in revenues in Q1 of 2019, a 44% increase from the $668 million it reported for Q1 of 2018.

Learning from Square’s Other Products

Cash App, which was launched in 2013, is a relatively new addition to Square Inc.’s business. When it was founded in 2009, the company started with a product that gave small businesses the capability to accept credit card payments. From there, the company expanded to create an “ecosystem” of both software and hardware fintech products that make it possible to manage a business using exclusively Square products.

With Cash App, Square’s vision is to create a similar fintech ecosystem for individuals. Ultimately, the Cash App ecosystem should effectively function as, and therefore replace, a bank account. The introduction of the Cash Card and improving users’ access to bitcoin are both steps in this direction.

Individuals can even use their Cash Card to get cash back at stores that offer that service with debit purchases.

Expanding Oversees

In the second quarter of 2018, Cash App’s basic P2P functions became available in the UK. According to Square’s annual report, this is only the beginning of the app’s foray into international markets. Square’s various business-solution products are already available in Canada, Japan, Australia, and the UK. However, Square hasn’t announced when consumers in these markets, and others, might gain access to Cash App as well.

Key Challenges

As previously mentioned, Cash App’s biggest challenge is the intense competition in the P2P payment industry.

The U.S. fintech industry is dominated by PayPal Inc. (PYPL), PayPal-owned Venmo, Facebook Inc. (FB), Alphabet Inc. (GOOGL), Apple Inc. (AAPL), Inc. (AMZN), and Square, each of which has launched a P2P payment service in the last decade. So, needless to say, Cash App is competing with some seriously heavy hitters.

No Longer King of the Mountain

And that’s not all. If Cash App’s triumph over Venmo is any indication, there is still room in the P2P payment market for others to find success, especially competitors from oversees. Tencent Holdings, WeChat’s parent company, also offers a P2P payment service on that platform, which it recently expanded to Europe.

Although Cash App’s increasing involvement with bitcoin has been profitable so far, some investors might see this as a liability due to bitcoin’s continued volatility. If consumers eventually abandon bitcoin, it would mean the failure of one of Cash App’s biggest ventures.