The Covid crisis may accelerate Square’s move into consumer banking:
This week, Credit Suisse released research estimating that 1.2 million Cash App users have set up direct deposit, up from just 500,000 at the end of March. Chime, with its 8 million accounts and estimated 5.3 million customers, likely has 2 million direct deposit users.
In its path to becoming a digital bank, Square isn’t stopping with direct deposit, says Credit Suisse analyst Timothy Chiodo. “We think they’ll add budgeting tools and bill payment capabilities.” Credit cards and buy-now, pay-later loans will get added, too, he expects. By piling on more financial products, Square will ramp up profitability under the same strategy banks have used for centuries: Attract customers with one feature, then cheaply cross-sell them on others. For instance, it’s free to buy a stock or send money to a friend with Cash App. But to instantly transfer money into your bank account, Square charges a 1.5% fee, up from 1% last year.
One major investor in Square, New York investment management firm Ark, claims Dorsey’s company poses a large threat to brick-and-mortar banks because it can acquire customers much more cheaply.Cash App can recruit a new user for as low as $20, while it costs banks nearly $1,000 to reel in one. The key question becomes how valuable those customers are. For traditional retail banks, a customer’s lifetime value ranges from $1,500, according to Ark, to, according to banking analytics firm Novantas.
Investors have been impressed by Cash App’s recent progress. After the company reported first-quarter earnings on May 6, 2020, Square’s stock surged 10%. It’s down just 4% from the market’s peak on February 19, 2020, before the coronavirus crisis caused stocks to drop steeply. Over the same period, the S&P 500 has fallen 13%.
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