What's Square Hiding in Its Cash Drawer?

Square Cash has changed a lot since it was introduced as an almost purely email-based person-to-person payments service in 2013, but the addition of its Cash Drawer feature is perhaps the biggest game-changer.

Until Monday's update, Square Cash looked like little more than a vestige of Square's many failed attempts to create a consumer-facing product line. The newest update rescues Square Cash from the graveyard of its many consumer apps — including Square Wallet and Square Order — and gives Square Cash a seat at the table among Square's flagship business offerings.

It's a strategy Square hinted at with the early-2015 introduction of "$Cashtags," which were usernames that businesses and charities could post on social media to request payments and donations. The new Cash Drawer is a stored-value account, allowing users to store funds with Square Cash rather than link all transactions to a debit card.

And it's no mistake that Cash Drawer takes its name from a staple feature of the point of sale.

"A business may wish to turn on the feature so that they can easily track and manage their business payments in one place, rather than have them stream into their bank account," Square spokesperson Catherine Ferdon said.

Square Cash is no substitute for Square Register, the company's mobile point of sale app which pairs with a hardware device for magstripe, EMV-chip and Apple Pay transactions. But if Square Cash generates a strong following, it would give Square an early foothold in a world where payments become purely digital.

Consumers can also store funds in Cash Drawer, making it easier to budget for regular P-to-P transactions like splitting rent payments, Ferdon added. Square has also steadily fleshed out its P-to-P app's features for consumers, such as last year's addition of a payment request feature and a way to locate other users via Bluetooth.

By building this kind of budgeting capability into its mobile app, Square has developed "an interesting model" that not many other P-to-P providers have pursued, said Maria Arminio, president of Avenue B Consulting Inc., a Redondo Beach, Calif.-based payments management consulting firm.

"They are creating a prepaid account, which is a balance of records of sorts, and distributing that to the wallet app," Arminio said. "Users create their own pool of cash from the infrastructure of how a prepaid card works."

Unlike the prepaid card market, which has a large unbanked audience, Square Cash still requires users to have a debit card to add funds via Cash Drawer. Users can also withdraw funds to a linked bank account, and will soon be able to use that bank account to add funds as well.

In the future, other P-to-P developers will flesh out their own offerings, with many focusing on quick access to emergency cash that can be obtained through the app at ATMs without a card, Arminio said. Another focus will be real-time money transfers, she said.

Square's strategy shares a lot with the mega-banks' clearXchange network, which originated as a P-to-P system but quickly developed into a platform for other types of transactions. In merging clearXchange with Early Warning this year, the banks further fleshed out the network's capabilities with an eye to security.

Another major threat is Facebook, which added a payment capability to its app last year. In doing so, Facebook follows the lead of offerings like PayPal's Venmo in adding payments to social media interactions.