Square may have cracked the code on monetizing P2P payments

Square Cash generates a lot of revenue – and the road to Square’s success is the Cash P2P app, along with Seller tools, as its two curated ecosystems that are cross-selling their way to profitability.

When Square Cash was launched in 2015 out of the ashes of other failed Square apps such as Square Wallet, it was barely an app — the P2P service ran primarily over email, and the Square Cash app existed to help compose those emails.

The challenge for Square was how to rapidly scale its user base just like Venmo and make money such as Fiserv was doing, by having its bank partners charge for transfers – something no P2P app had yet been able to achieve.

Until now.

Square reported that its Cash app earned $307 million in net revenue and $123 million in gross profit in its third quarter of 2019. Excluding bitcoin, Cash app revenue was $159 million and gross profit was $121 million for the quarter, up 115% and up 125%, respectively, from the same period one year earlier. Cash’s success is all predicated on a consumer coming into the Cash ecosystem and buying other products.

“An individual comes into Cash app because they received some money from their friend or a new employer, not only do they find the fastest way to send and receive money, but also a free Visa card they can use everywhere for purchases, an instant rewards program called Boost, a way to invest their money in the stock market or even bitcoin, and a way to quickly pay a yoga teacher or a dog walker,” said Jack Dorsey, co-founder and CEO of Square, in the earnings call.

The secret to achieving revenue growth and profitability lies in two major strategic moves. First, Square has taken a laser focus on how it is organized by creating two ecosystems: Seller, which includes all the tools merchants need to run their businesses such as registers and Square Capital; and the Cash App. It jettisoned anything that doesn’t fit into either of these roles, such as Caviar food deliveries.

The next move was to curate the two ecosystems such that once a merchant enters Seller or a consumer enters Cash, Square is able to effectively cross-sell other products in the ecosystem in order to earn money.

Dorsey also reported that the Cash app’s ability to send and receive money means that merchants are using it to pay their employees and contractors, which in turn brings new consumers into the Cash ecosystem.

“Having one of these ecosystems at scale is incredible, but having two that can interact with and strengthen each other is profound,” added Dorsey.

However, since the launch of Square Cash the P2P payments sector has not stood still. Earlier this year Venmo announced that it has 40 million active users. In comparison Square Cash had only 15 million users at the end of 2018.

Additionally, the new bank-supported P2P network Zelle has come into the market with roar, already serving half of banked U.S. adults. Zelle offers fast, oftentimes instant payments at no cost to the consumer, and is built into bank mobile apps and bank online bill pay making it easy for consumers to use.

Since Zelle is being used by banks to keep consumers on their digital banking platforms, achieving profitability from the P2P capability is less important since it improves bank customer experience and, in theory, lowers bank attrition.

For companies such as PayPal and Square whose users come to simply send and receive money, achieving profitability is not only important but critical for long-term survival. The road to monetizing these P2P payment apps has been a difficult one since users have become accustomed to free transfers so it means they have to add other money generating services to cross-sell.

Venmo added a debit card in 2017, following a similar move by Square, so consumers could spend their money in physical stores and also created ties with companies such as Uber to drive purchase transactions from its wallet in an effort to charge merchants interchange fees.

Despite all of Venmo’s efforts, PayPal has struggled to monetize its P2P platform, but there is a light at the end of the tunnel. During PayPal’s third quarter 2019 earnings call, CEO Dan Schulman said “We ended Q3 with Venmo just shy of a $400 million annual revenue run rate.”

While that may sound impressive, Square executives reported that the Cash app, excluding bitcoin, is on a $600 million annual revenue run rate — and that’s with less than half the number of active users on Venmo.

“As the Cash app service has scaled over the past three years, it has built a strong business model with compelling cohort economics that have improved the ecosystem’s margins each of the last three years,” said Amrita Ahuja, chief financial officer at Square. “The growth in 2019 has been greater than 100% on the topline and now with its over $600 million annualized revenue run rate naturally growth rates at this level you’d expect to come down over time. The biggest drivers for cash app — as you know, instant deposit and Cash card — will be growing in 2020 off of a larger base as those two business lines have ramped rapidly in 2019.”

Square revenues for its third quarter, ending September 30, 2019 were $1.27 billion, up 44% from the same period last year. Gross profit was $500 million for the third quarter of 2019, up by 42% from the same period last year. Finally, Square earned $29 million in net income in the third quarter of 2019 compared to a net loss of $20 million in the same period of 2018.