CashApp Is King

CashApp is a digital wallet that's part of Square, a $100b company co-founded by Jack Dorsey. I look into CashApp's business model and unit economics.

Happy 2021! Many people that are way smarter than me wrote deep dives about Square (I have some links at the bottom). But I was fascinated about the company, and CashApp specifically, and have been wanting to write about it for months. I finally finished my analysis and am very excited to share my observations. I deconstruct CashApp’s business model, revenue sources and ARPU. Hope you’ll enjoy it. Share your thoughts and feedback!

Jim McKelvey, a part time glass artist, lost a sale when he couldn’t accept customer's amex card. He described the journey in his recent book The Innovation Stack. He and Jack Dorsey of Twitter fame were going to start a company together. After Jim’s setback they realised there were millions of small merchants who have the same problem. Square was launched in 2009 and as of writing is worth $106 billion.

The original Square business of cute credit card readers (now called Seller) has grown to include capital, invoicing, CRM, payroll, and many more. This year it will launch a bank to start accepting deposits and lend from the balance sheet. Incidentally I wrote about the value of such a transition in relation to Stripe, Square’s competitor in Stripe Should Become a Bank.

More advanced products allowed Square to onboard bigger and more valuable customers - today over 60% of its gross transaction volume comes from larger businesses with turnover of over $125k per year. 

I am, however, more excited about Square’s consumer product - a digital wallet called CashApp, launched in 2013 from internal hackathon.

CashApp’s innovation stack

Jim Mckelvey describes the innovation stack that made Square so successful (from the book): 

We want to allow millions of small businesses to accept credit cards for the first time, so we have to make it easy to sign up. We need easy sign-up, so we have to design simple software and eliminate paper contracts. We have millions of people signing up, so we have to keep our customer service costs down. We need to keep customer service costs down, so we have to have simple pricing, and net settlements, and no hidden fees, and no paper contracts. We need to have a low price, so we have to save money on advertising, so we have to have an amazing product, and hardware so cool that people talk about it, and a product that they can explain without our help.

Brian Grassadonia, a head of CashApp and Square’s first product manager said CashApp took a lot from Seller’s growth playbook. Using Jim’s analogy and Brian’s thoughts, my interpretation of CashApp’s innovation stack will be along these lines:

  1. Build peer-to-peer product so great (utility x simplicity) that people bring their entire networks to it

  2. Reinforce the growth with innovative ways of acquiring customers at massive scale and incredibly cheaply

  3. Design adjacent products such that each new product enhances existing ones allowing customers to find more utility in the network

Let’s look at each of these three stacks.

Innovation stack 1 - peer-to-peer network

Brian said that CashApp achieved an early traction in US Southeast thanks to its utility. People who were living paycheck to paycheck started using CashApp because they could transfer money fast and for free. With word of mouth spreading fast CashApp’s network became viral. From 2015 to 2018 the number of active customers was more than doubling every year.

So the initial product market fit came from obsessively fine-tuning the utility of peer-to-peer transfers that wold then take care of referrals. The network scaled to 80 million customers (~30m are monthly active). It continues to grow with Q3’20 reaching record new sign-ups.

In its growth CashApp practically stepped over Venmo’s share, an incredibly popular peer-to-peer wallet owned by PayPal. Number of app downloads for CashApp have exceeded those of Venmo. Number of Google searches for Venmo vs CashApp over time is also telling.

So how has CashApp scaled its virality so quickly?

Innovation stack 2 - innovative marketing

CashApp acquired customers unbelievable cheaply. According to CFO Amrita Ahuja between 2017-2019, the average cost to acquire a net transacting customer was $5. By all meaningful definitions it is a fraction of a cost compared to other fintechs, let alone banks.

Instead of paying to Facebook and Google, CashApp decided to give away money to customers directly or via celebrities. There is a lot of excellent analysis on CashApp’s advertising and social media strategy here, here, and here. This tweet pretty much summarises the strategy. Burger King, Travis Scott, Cardi B, Kim Kardashian, and many more collaborate with CashApp to engage with their followers.

CashApp became so trendy that it is part of hip hop culture now. There are 500+ songs on Spotify with “CashApp” in the lyrics. Today CashApp has 1.1 million Twitter followers and 1.6m Instagram followers. Compare this to Venmo’s 60k on Twitter and 40k on Instagram.

This distribution allowed CashApp to build products that reinforced the value of the network.

Innovation stack 3 - utility

Started as a peer-to-peer payment wallet, the first product built on top of it was a virtual card, followed by a debit Cash Card. Cash Card was propped by Boosts - discounts and rewards at selected merchants. Combined with ability to directly deposit paychecks and tax credits (Direct Deposit), Cash Card allowed customers to interact with CashApp fundamentally as a bank. CashApp’s tagline is “Send, spend, save, and invest. No bank necessary.”

Introduction of bitcoin in 2017 and stock trading last year boosted the ecosystem even more. Stock trading was by far the fastest growing customer feature on CashApp with 2.5 million customers having traded within the first year. For reference Robinhood has 13 million customers. 

There is only one product missing from an otherwise cohesive banking experience - lending. But Square is already testing a move to offer up to $200 to some customers. Personal lending is definitely an investment that CashApp is pursuing. Square CFO said that the CashApp was “too profitable” in 2020 and so it is investing $500 million in CashApp’s development this year (more than in Seller).

So where does CashApp's profits come from?

CashApp’s business model: gross profit and ARPU

CashApp made $1.4 billion of revenue in Q3’20 excluding bitcoin and $385 million of gross profit. This is 2x growth from a year ago. CashApp’s gross profit is now half of the entire Square. It has three reported revenue streams: 

  • subscription and services fees that include debit card interchange, instant deposits and interest income

  • transaction revenue from CashApp Business and credit card transfers 

  • bitcoin revenue

Subscription and other services revenue

By far the largest proportion of gross profit comes from subscriptions and services fees which include Cash Card interchange fees, instant withdrawal fees, and interest income CashApp makes on customer balances. Stock brokerage is free.

Square doesn’t disclose the breakdown, but the growth in profit in the last few quarters is likely tied to distribution of covid relief stimulus which would have directly driven the revenue from instant withdrawals, as well as interest income Cash App would make on higher balances.

Interchange revenue will become a bigger part of services when Cash Card adoption improves, reducing gross profit margin which right now is high thanks to low cost products in the mix.

I used some high level assumptions in breaking down gross profit of this segment. I think the split is within the ballpark, but numbers are my own. Please follow my calculations here

Transaction revenue 

CashApp defines transaction revenue based on volumes from CashApp Business and credit card top-ups.

CashApp Business makes accepting business payments from CashApp customers easy. This is a product that consolidates activity within the CashApp ecosystem, and so is more profitable: similar to Seller business, Square puts a fee of 2.75% on payment volumes but it gets to keep most of it. Crucially, profitable CashApp Business transaction volumes are growing, today accounting for 9% of total Square volumes, up from 4% just six months ago. As an extension, Square’s total transaction margin has improved from 38.5% to 43%+. Growing adoption of CashApp Business will expand the margin further.

Bitcoin revenue

Despite outsize impact on revenues, the gross profit from bitcoin is the smallest of the three revenue streams. CashApp nets a fee of ~2% on volumes of bitcoins transacted. In Q3’20 CashApp made a revenue of $1.6 billion up by 1.9x from the previous quarter, resulting in a profit of $32 million. There is large opportunity to grow bitcoin adoption on CashApp. For example Coinbase moves ~$1-1.5 billion of bitcoins per day (as of writing) or 90x more than CashApp.

Average revenue per user

CashApp’s average revenue per active user (ARPU with bitcoin at gross profit level) has grown from $15 to $45 according to Brian Grassadonia, in the span of two years. Annualised Q3 ARPU is actually running at above ~$50 based on my extrapolation of monthly actives reaching 35 million. With acquisition costs as low as $5, CashApp has a great business - it reached EBITDA level profits in 2020.

Customers who have adopted Cash Card, on average, bring 3-4x more in revenue from interchange and instant withdrawals. This means that in Q3 Cash Card customer’s ARPU was ~$120 compared ~$30 from less monetised users. So even less monetised users have positive unit economics.

CashApp can better monetise customers who are already on the adoption curve. Cash Card customer ARPU has doubled within 9 months compared to just 40% growth in ARPU for less engaged customers.

CashApp’s execution excites me as almost every single line of business is growing and improving:

  • They are able to monetise customers along the adoption curve and also grow revenue from less engaged users

  • Margins of two out of three revenue streams are at 70%+ (transactions and services). Margins for bitcoin revenue are small, but as a scale business its sheer volume will take care of the bottom line

  • They are growing “in-ecosystem” profitable transaction volumes that improve Square’s net take-up rates - this is a place to watch for more ecosystem integration and more profitable growth

  • Cash Cards economics relies on more than interchange (+ lending uplift soon).

I can’t think of a bear case for CashApp, but these are some of my concerns:

  • Low active rates: CashApp has a relatively low monthly active rate at under 40%. Total customers that have ever transacted reached 80 million. Active JPM Chase customers stand at ~50 million. So the ability of CashApp to scale directly depends on whether it can re-engage its inactive customers.

  • Low take-up of profitable products: Despite roll out of Cash Card in 2017 and Boosts in 2018, adoption stands at 25% of actives. Cash Card paves a path for customers to use CashApp as a bank, so its adoption is crucial. Lending would help with that.

  • CashApp’s main moat might not be as defensible: CashApp itself has proven that it is possible to challenge Venmo’s peer-to-peer network moat. Unlike social media, financial networks respond to financial incentives. Network effects can pull customers in, but they need to see the utility to stay on. A lot of newer competitors are growing their customers quickly and using similar social media approaches, e.g. Current. Whilst I don’t think any of the challengers, or for that matter incumbents, could significantly push CashApp, the competition for customers is intensifying (additionally boosted by US expansions of international neo-banks).

The road ahead

Brian Grassadonia said that CashApp will be focusing on re-acquiring inactive customers and increasing customer engagement. Apart from using advertising and social media, customer engagement will increase when CashApp adds new products and starts integrating vertically with Seller.

Adding new products

We might see more acquisitions from Square in the future that boost CashApp, e.g. Credit Karma’s tax business which is adjacent to spend and save. There is an interesting case for Twitter acquisition but I still don’t get how Tidal adds value.

A more natural extension is lending with products along the maturity curve from overdrafts, credit cards to even mortgages. For example, Buy Now Pay Later is definitely hot right now and synergies with Seller side are apparent.

Integrating ecosystems

The growth of CashApp Business which serves as an intermediate step for micro businesses before they are big enough to onboard onto Seller platform is getting traction. Today these businesses already account for 9% of total Square volumes.

But integration with Seller ecosystem is even more exciting.

It is rather remarkable that CashApp grew to its current state of ~30-35 million active customers without any significant prop up from a more mature and established Seller side. That’s why the prospects of integrating two large, growing and adjacent businesses are so exciting.

The most obvious path is for Seller to build a checkout with CashApp payment option that would eliminate fees Square has to pay to Visa/MasterCard for example. Other products to tie segments closer could include credit a-la BNPL, Boost partnerships, travel booking, restaurant booking, etc. - all things super-app-esque.

Ecosystems are incredibly profitable because they capture both ends of the platform - supply and demand. For example, which I wrote about, is a typical example of uber-successful ecosystem which has effectively monopolised payments such that 60% of all transaction volumes of the whole country move via Kaspi.

CashApp has demand, but Seller doesn’t have a supply yet. That is partially a reason why Seller is focusing on onboarding larger customers and expanding its sales team.

Square already had the experience of looping in an ecosystem that wasn’t ready when it launched Square Wallet. Customers could pay at participating merchants, e.g. Starbucks. Shortly after, the product was aborted and Square lost $70 million. The then CFO later said: “ if you tried to contain what a consumer wants to do, you effectively are removing utility from them.” This is the reason they are very cautious right now.

I do think that Square will be adding more integration points, but from the sideways in less restricted ways. Recently they launched payroll products which allow Seller merchants to pay salaries to their employees faster if they are on CashApp. With onboarding bigger customers that have more employees, Seller could become a great channel for CashApp distribution. Especially if it is tied to opening Cash Cards.

On reflection, I think giving autonomy to CashApp from the start was the best thing to happen to CashApp. It had a chance to develop its own brand, vision and tone of voice. If CashApp was lumped with Seller business as one of the offers to merchants, it would have been much smaller today. Meanwhile, Square is successfully growing both businesses independently, whilst we eagerly anticipate the integration. Jack Dorsey seems to be very comfortable with compartmentalising.

These are great reads on Square that helped me a lot to understand the company:

  • ARK-Invest coverage of Square is excellent and transparent. I especially recommend this white paper, and this valuation model

  • One of my favourite finance newsletters Net Interest had a post on Square

  • This breakdown of Square is also great, as well as this deep dive into its growth