Square’s Cash App and PayPal’s Venmo solutions are seeing fantastic growth recently, as social distancing has consumers looking for more electronic means of exchanging money. These apps were also able to get in on the Economic Impact Payments (EIP) by having their users provide their account information through the IRS portal, as did many other prepaid account holders.
As MarketWatch noted, Square reported a health new balance of Cash App deposits:
Square disclosed on its latest earnings call that direct deposit volumes on its service grew by three times in April as customers moved to store more than $1.3 billion in aggregate balances on the Cash app during the month.
What started as simple person-to-person (P2P) funds exchange apps are now morphing into full-fledged bank accounts. These solutions store balances, offer card and mobile payments, and are moving into savings options. I agree with the article; if these apps can convince users to have their payroll deposited to their Venmo or Cash App account and can also get users to try their bill pay services, then they will really lock in their customers.
Who needs to be concerned about this? Traditional banks may need to be concerned in the long term if Cash App and Venmo can hold on to their younger clientele. Near term, Neo or challenger banks need to watch out. And of course, competition between the two fintechs is likely to be fierce. (Let’s not forget that Square has made their intentions known by pursuing a bank charter!)
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.
Overview by Sarah Grotta, Director, Debit and Alternative Products Advisory Service at Mercator Advisory Group