Square has allowed Cash App users to buy and sell bitcoin on the platform for years, and it recently added equities trading as well. The company’s debit card lets users choose amongst a rotating set of rewards including 10% off DoorDash orders or 10% off a purchase at any grocery store.
“I think they’re likely to retain new users that they’ve gotten from stimulus products or people looking to save money on non-discretionary items like groceries,” Beck said.
Eventually, the company could branch into adjacent areas, such as deposit accounts, savings accounts, credit cards, or loans, according to Beck. (On the merchant side of the business, Square has obtained conditional approval for a bank charter that will let it more easily distribute loans to sellers.)
A company like Square could also more closely link its merchant and consumer businesses, Friedrich said, using coastal merchants to drive more Cash App users and allowing local businesses to offer targeted discounts to nearby Cash App users.
He projects that there could be 220 million digital wallet customers by 2024 and calculates that if these customers were assigned a “lifetime value” similar to that of traditional bank customers, it would represent a $800 billion opportunity
The Holy Grail for PayPal, Venmo, and the Cash App is convincing users to set up direct deposits of their regular paychecks through these services, but that appears to be a tougher sell than it was for the one-time stimulus payments, said Lisa Ellis, a payments analyst at MoffettNathanson.
“Wherever your paycheck is going, that’s your home base, and banks typically own that,” Ellis told MarketWatch. She said that while some users who tried Venmo or the Cash App for the first time to access their stimulus payments may stick around and try out other features, it’s still an “open question” whether these users will deem the user experience to be so much better that it becomes worthwhile to set up direct deposits of their real paychecks.
Square Chief Financial Officer Amrita Ahuja said on the last earnings call that direct-deposit customers “have generated revenue, which is multiples higher compared to customers who only use peer-to-peer.” They typically carry higher balances and engage with more of the company’s services.
Amassing regular direct-deposit customers could hinge on feature improvements. PayPal, for example, is making a large push into bill payments through a partnership with Paymentus, which aims to help customers more easily manage recurring bills. A better bill-pay experience could prompt more to ship their payments straight to PayPal or Venmo, Ellis said, since many people go to handle their bills shortly after getting paid.
“The idea is that the large banks like Chase are working on something similar, but naturally not everyone banks with large banks and the small banks are nowhere on this,” she said. “Even if Chase rolls it out, there are lots of customers out there who wouldn’t have access.”
Venmo and the Cash App already have an edge on the traditional banks, according to Ark’s Friedrich, who estimates that each service had more active mobile users last year than any mainstream bank.
Of course, that assumes that Venmo and the Cash App morph into “real banking platforms” that generate “real banking revenues,” which Friedrich admits is a “bull-case scenario,” especially given that PayPal has proceeded more carefully with how it adds features to Venmo
Still, he said it’s “interesting to think about what scale [the digital wallets] could go to,” given the more optimal margin structures of digital banks.
Investors, for their part, seem to be slowly coming around to the value of digital wallets. Beck said there was “low” investor reception when he suggested back in December a high standalone valuation for the Cash App, but now Wall Street appears to be looking past retail-related challenges for Square’s merchant business, in part due to the potential for a surge in Cash demand.