Why Cash App Pay is a big deal for Block
Why Cash App Pay is a big deal for Block
It's Cash App Pay, not lending, that will drive the next phase of Cash App's growth
Hi!
This week, Morgan Stanley downgraded Block to “Sell” and issued a price target of $60 a share (the stock was trading around $80 when this happened). The analysts had two arguments for the downgrade: 1) the market overestimates Cash App’s gross profit growth potential (user growth should slow down, and it will take time to scale lending), and 2) it will be difficult for Block to reignite growth in its Square business due to increasing competition.
I will leave the topic of Square’s growth potential for later, and today will focus on Cash App. I would argue that Cash App’s main growth driver, at least in the short term, will not be lending, but rather Cash App Pay. Cash App Pay allows Cash App users to make online, offline, and in-app purchases using their stored balance or connected debit cards. You can think of Cash App Pay as Block’s alternative to the PayPal button.
In its Q4 2023 Shareholder Letter, Block disclosed that in December 2023, Cash App Pay generated $2.5 billion in annualized Gross Payment Volume. This is not much, but the product was rolled out only in late 2022, so it is growing fast. Cash App Pay has a much higher take rate than the interchange that Block earns on the Cash Card spending. Thus, even if only a portion of Cash Card spending goes through Cash App Pay, it will give Block a meaningful boost to gross profit.
Let’s take a closer look.
Jevgenijs
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A quick intro to Cash App Pay. Cash App Pay allows Cash App users to make online, offline, and in-app purchases using their stored balance or connected debit cards. You can think of Cash App Pay as Block’s alternative to PayPal, with Cash App Pay being the PayPal button at checkout, and Cash App being the PayPal wallet. Initially, it was available only to Square merchants, but later the product was rolled out outside of Block’s ecosystems. For example, the service is available to U.S. merchants using Adyen or Stripe.
To understand the impact that Cash App Pay might have on Block’s financials, we need to go back to Block’s Investor Day 2022. During its Investor Day, Block’s management revealed the “inflows framework”, which decomposes Cash App’s gross profit. Cash App’s gross profit is the result of Monthly Active Users multiplied by the Inflows per Active and multiplied by the Monetization Rate. For instance, in Q4 2023, Cash App generated $942 million in gross profit excluding the contribution from Afterpay.
In 2023, Cash App continued to gain customers with the number of monthly active users reaching 56 million by December 2023, up 9.8% from 51 million in December 2022. The growth is slowing (the number of actives increased 15.9% YoY in December 2022, and 22.2% YoY in 2021), but continues. The slowdown in user growth was one of the key Morgan Stanley’s arguments for a bearish outlook on Cash App’s gross profit growth prospects.
Inflows also continued to grow reaching $248 billion in 2023, an increase of 22.2% compared to $203 billion in 2022. For the full year 2023, inflows per active increased 8.2% YoY. Morgan Stanley analysts argued that Cash App users might be approaching the maximum amount they can spend, given their income profile (Cash App’s customer base “is largely made up of customers with a household income of less than $100,000 per year”).
However, as per the comments in the company’s latest Shareholder Letter, Block’s management sees the opportunity to “serve customers with a household income of up to $150,000 per year” by improving Cash App’s capabilities to serve families, including families “with higher-household-income parents and their dependents.” Serving customers with higher income would extend Block’s runway in terms of growing inflows per active use.
Now let’s get to how Block monetizes these inflows…In 2023, 38% of Cash App’s gross profit came from Financial Services (Cash App Card interchange, ATM fees, Cash App Borrow, interest on customer funds, and Cash App Pay), 29% came from Instant Deposit fees, 17% was contributed by BNPL (Afterpay), 8% came from peer-to-peer payments, and finally, 7% was contributed by Bitcoin markup.
Please note that the monetization rate used in the “inflows framework” does not include BNPL. So, if we exclude BNPL contribution, then Cash App’s gross profit in 2023 was $3.57 billion, and Financial Services contributed 46% while Instant Deposit fees contributed 35% of Cash App’s gross profit excluding the contribution by BNPL.
The way to think about it is that Cash App customers added $248 billion to their accounts (the inflows), spent a portion of this money with the Cash Card and withdrew some via ATMs (with Cash App earning the interchange and ATM fees), spent some money with merchants using Cash App for Business (with Cash App charging the merchant 2.75% fee), bought some Bitcoin (with Cash App charging a 2.2% markup), and withdrew the rest to their accounts (in some cases using Instant Deposit and paying a 0.50 - 1.75% fee).
Let’s try to size these flows. Total inflows in 2023 were $248 billion. Money spent on Bitcoin was $9.5 billion (same as Bitcoin revenue). Some clients most likely bought and then sold Bitcoin, but for the sake of simplicity, let’s assume they bought and held. Cash App for Business GPV in the quarter was $18.1 billion (reported as Cash App GPV). Customer funds were almost unchanged from 2022 to 2023 according to Block’s 10-K, so Cash App’s customers did not accumulate extra balances on their accounts.
This means that roughly $220 billion was spent with Cash Card or withdrawn to bank accounts or via ATMs. Using Marqeta’s disclosures (Marqeta is Cash App’s issuer processor), I estimate that, in 2023, $140 billion was spent using Cash Card with Block earning around 0.90% on this spending in interchange. This leave around $80 billion that was withdrawn via ATMs, or to users’ bank accounts. According to my estimates, the Cash Card volume increased by around 30% compared to 2022.
Finally, putting it all together. As can be seen from the pricing on Stripe and Adyen websites, Block charges merchants 2.9% for Cash App Pay transactions. This means, that Cash App Pay has a 2-3 times higher monetization rate than Cash Card, Instant Deposits, or ATM withdrawals. Even if the number of active users and the average inflows per active stop growing, Cash App can continue growing its gross profit by incentivizing its customers to spend money via Cash App Pay instead of using Cash Card (or withdrawing altogether).
Yes, it will take some time for Block to get the adoption of the Cash App Pay. However, we should not forget that Block already has relationships with merchants via Square and Afterpay, and merchants already see Cash App users amongst their customers via Cash Card purchases. As per Block’s disclosures, more than 50% of Cash App spent was made in discretionary categories, such as big box and discount retail, restaurants, as well as travel and entertainment.
Getting back to the “inflows framework.” If Block manages to successfully scale Cash App Pay, monetization of the inflows will increase, as Cash App Pay has a much higher take rate than Cash Card spend or ATM/Instant Deposit withdrawals. I don’t know how fast this will happen, but to illustrate the potential, we can assume that the monetization rate will increase from 1.48% to 2.00%. This would result in $1.3 billion in gross profit even if the number of actives and the inflow per active remain the same (see below). That’s a 35% growth.
Morgan Stanley analysts completely dismissed the idea of Block succeeding in connecting merchants with Cash App users as “driving the necessary awareness and engagement to achieve that aspiration [ will be ] challenging.” I disagree. I believe Block can connect its two ecosystems and go beyond that by getting Cash App Pay installed on non-Square merchant websites. Let the time tell who’s right on this.
Many thanks to @sjwijsiene jdjejddb for helping me spot and size this opportunity
Cover image source: Block
Disclaimer: Information contained in this newsletter is intended for educational and informational purposes only and should not be considered financial advice. You should do your own research or seek professional advice before making any investment decisions.
Is it still the same as above? card present (2.6 +10c) and non present(2.9 +30c).
do you know if there's a difference in the tr% for cash app pay; stored balance vs linked debit card?