Square's Hidden Moneymaker in the Cash App - Motley Fool

Square (NYSE:SQ) is trying to disrupt nearly every part of the financial system from how businesses take payments to how consumers transfer money to the money we use itself by offering Bitcoin (CRYPTO:BTC). But the fintech stock could also generate a significant amount of value from advertising. 

The Cash Card Square offers through the Cash App, which includes physical and digital cards, also includes a "Boost" feature. Users can boost their purchases and get discounts, cash back, and even Bitcoin for using the card. What may not be appreciated is that companies pay for the ability to offer Boosts, and this could help Square's revenue and earnings long-term. 

Image source: Square.

Square's secret advertising business

Most features in the Cash App are free for users, like transferring money to friends or buying stocks. But the Boost feature is a hidden moneymaker because Square charges for the offering. Here's what the company said about the feature's monetization in its 2020 10-K filing:

Some Cash Boosts are selected and funded by Square, while others will be funded by our partners. Costs related to the Cash Boost rewards program that are funded by Square are recognized as reductions to revenue.

Square is funding some of these Boosts, likely to get the program off the ground or promote Bitcoin in the Cash App. But as demand from corporate partners grows, it's likely Boost space is almost entirely pay to play. This may be an underappreciated advertising offering for Square. There's a limited inventory of Boosts, and people using the feature are the most highly qualified customers because they're literally buying goods from the advertiser. 

Square doesn't break out how much revenue or margin it generates from Boost, but the feature would have an extremely high margin because there are few marginal costs to bring it to users. The Cash App generated $495 million in gross profit in the first quarter, more than half of the $964 million gross profit for the entire company. Management said, "Revenue is primarily comprised of transaction fees from both Cash App Instant Deposit and Cash Card," so the company makes money on small fees on transactions, which Boost can add to.

Making the Cash App your digital wallet

There are multiple reasons Boost is good for Square's long-term business. First, Boost drives more use of the Cash Card. I have a Cash Card and I only use it when I have a Boost to use. I may be a low-volume user now, but if incentives to use the card improve, so could my usage. For now, just keeping me active in the Cash App ecosystem is a win for Square. 

One of the Boosts being offered is Bitcoin, which also gives users an incentive to invest in and use Bitcoin in the Cash App. Bitcoin generated a whopping $3.51 billion in revenue in the first quarter of 2021 and $75 million in gross margin, so any increase in the adoption of Bitcoin is good for the company. 

Getting customers to increase deposits, Bitcoin holdings, and transactions through the Cash App and Cash Card all feed into the company trying to be your digital wallet. And that would open up multiple revenue streams for Square, including additional advertising opportunities like Boost. 

Square's digital ecosystem could be an advertising dream

It's hard to think of Square as an advertising company, but advertising may be more important than I had previously appreciated. When you think about what advertisers are looking for, they want to reach qualified customers who will spend money with them and give them an incentive to spend more frequently, and in higher amounts. Boost is literally matching advertising spending with dollars spent through the Cash App, so its value is high for advertisers. 

Boost may even open up additional advertising opportunities for Square. Through the Square and Cash Apps, the company knows exactly what consumers are spending money on and can match advertising with spending in real time. That could be more valuable than any display ad in social media or television spot and could help make Square an incredibly profitable company. 

This article represents the opinion of the writer, who may disagree with the "official" recommendation position of a Motley Fool premium advisory service. We're motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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