Square Wants Cash App to Completely Replace Your Bank

One of Square's (NYSE: SQ) top priorities for 2018 is to bolster and improve its financial services. It's found great success with Square Capital, its business lending arm, and has provided merchants with easy ways to manage their payrolls, track inventory, and other accounting tasks.

But Square's biggest leaps forward in financial services this year have been on the consumer side. Square is building more and more functionality into Cash App, and CFO Sarah Friar says there's still a lot more opportunity there. "Anything you do today with a bank account, you should look to the Cash App to begin to emulate more and more of that," Friar said at Recode's Code Commerce conference.

Specific examples Friar gave included the ability to invest in stocks or a savings product. Each represent great opportunities for Square to expand the Cash App user base and engage users, opening the door for potentially more lucrative opportunities down the road. That said, traditional banks shouldn't worry too much as Square's generally targeting the underbanked.

An investment in investing

Square got a taste of what it's like to offer a brokerage service when it started offering bitcoin trading late last year. In the second quarter, bitcoin transactions generated $37 million in revenue at a cost of $36.6 million.

Square might be interested in expanding to more popular securities like stocks, mutual funds, and bonds. Its no-trading-fee model has already proved popular in apps like Robinhood. JPMorgan Chase recently released its own free trading app, You Invest, to combat start-ups like Robinhood, and the rest of the industry may not be so far behind.

When the price is free, companies have to get more creative in how they monetize accounts. Robinhood offers premium trading services on top of its free-trades platform. Chase, of course, offers plenty of premium banking services such as mortgages and credit cards.

Square could simply bear the brunt of the costs associated with trading accounts and use it as an incentive to collect more data on its users. That data could be useful for services like consumer loans or digital advertising, both of which Friar has hinted as potential products.

Saving up for something nice

Friar also mentioned an opportunity to offer a savings product in Cash App, supposedly one that would offer interest payments or other incentives for storing cash in the app instead of a traditional bank account.

According to Friar, users already store more than $200 million in Cash App. Still, that's less than $30 per monthly active user (although that number's likely much higher when you exclude those with a $0 balance). Offering a savings account within Cash App could boost that number significantly higher.

Finding ways to get consumers to store more cash in Cash App can open up more opportunities for Square. A user may be more likely to use the Cash Card for purchases if he holds a larger balance in the app. Combined with direct deposit features, Square could get a more complete picture of a user's finances (earnings, spending, savings, etc). As mentioned, it could use that information for personalized lending decisions or for targeted advertising.

A massive opportunity

Square is targeting more than 30 million underbanked Americans with these financial services. These are people who don't have a bank account, have no way of depositing paychecks, and have no way to invest their savings. They also don't have easy access to lending services, credit cards, or any type of payment card. Those who do have some access are often turned off by high fees associated with accounts they're offered.

Providing more financial services to these consumers represents a massive opportunity. While they're generally harder to monetize, Square can still benefit long term by offering low- or no-fee services and providing more lucrative services, like personal loans, later.

Friar has shown a willingness to manage the company for long-term growth instead of focusing on short-term profit margins. So, even if these investments take a while to pay off, it shouldn't derail Square's strategy.

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Adam Levy has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Square. The Motley Fool has the following options: short January 2019 $80 calls on Square. The Motley Fool has a disclosure policy.