Square’s Most Important Product of 2019

Square‘s (NYSE: SQ) 2018 priorities are pretty well set. It’s investing in omnichannel capabilities, financial services, and its international markets. And the company’s first-quarter results showed progress on all of those fronts.

With regard to financial services, the Cash App is playing a key role. What started as a peer-to-peer payments app is now a tool for the underbanked, enabling direct deposits and in-store payments. Square increased the usefulness of the Cash App by issuing a Cash Card — a prepaid visa debit card — which works just like a debit card in stores and online.

The Cash Card will be Square’s most important product in the future, as it unlocks the possibility to offer merchants a direct line of marketing to consumers, and it opens the door for Square to offer consumer loans to its users. These are two areas with great potential for Square.

Image source: Square.

The new marketing options in Cash App

At the beginning of last month, Square introduced “Cash Boost” to Cash Card users. Users can select one of several cash-back rewards for using their Cash Card at specified merchants. Cash Card users can get a wide range of discounts at various retail chains.

It’s unclear whether Square has a partnership with any of the above merchants or if it’s funding the rebates itself. If Square can build up a broad enough user base, it may be able to attract merchants to offer rebates on Cash Card as a form of marketing. There are similar cash-back offer programs already popular with various other banks, so there’s clear demand for this type of marketing.

Square’s Cash Card is already off to a strong start. The company reported Cash Card users were spending at a $1 billion run rate in December. As consumers use the Cash Card for more types of spending, Square is able to collect data on their behavior and enable merchants to get themselves in front of the right audience at the right time. Indeed, Square’s data is, perhaps, its most valuable asset.

Creating a marketing platform within Cash App is a great way to monetize the app, which has yet to generate meaningful revenue for Square.

Square Capital…for everyone

Square Capital has been one of Square’s most successful ancillary products. Square uses a merchant’s data to determine its creditworthiness, and it’s able to extend loans to businesses that otherwise might not qualify for a loan through a traditional bank. Square also makes it easy to pay back the loan by taking a share of every swipe.

It’s easy to see that model extending to Cash Card users, especially if they also use the Cash App as their primary banking tool. Square could determine a person’s creditworthiness by examining their spending on Cash App and with the Cash Card. Square could then offer the consumer a loan as a line of credit for spending on the Cash Card, similar to a credit card. It could then take a percentage of every direct deposit or peer-to-peer payment to repay the loan.

Consumer loans is big business, and Square rival PayPal (NASDAQ: PYPL) built a successful consumer loan program. It built up a portfolio of about $6 billion in receivables, earning relatively high interest rates before it decided to sell the business to Synchrony Financial, a deal expected to close in the near future. PayPal exited the business due to its capital-intensive nature, deciding to free up capital for other things like acquisitions and share buybacks.

Square is already deeply entrenched in capital loans. It’s issued nearly $2.5 billion in business loans since 2014 — $339 million in the first quarter alone. But it doesn’t typically carry the loans on its balance sheet, instead offloading them to banks. Square merely facilitates the loan, which is the position PayPal has settled on as most advantageous.

Using the Cash Card as a tool to facilitate consumer loans could be a major development in Square’s business. It also creates a virtuous cycle where consumer loans facilitate more engagement with the Cash Card and Cash App, producing additional data, which can further improve Square’s business.

Square has laid the groundwork for the Cash Card to become the backbone for two big potential products in the future. And we could see it play a much more important role in the business as early as 2019.

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Adam Levy has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends PayPal Holdings and Square. The Motley Fool has a disclosure policy.

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