One of the consequences of the digital age has been the slow but steady abandonment of cash-based payment methods and the increasing adoption of cards and apps -- often called the war on cash. This has created a massive opportunity among the digital payment set, with banks, payment processors, and even big tech fighting for a piece of the pie.
An early winner in the fray has been PayPal (NASDAQ: PYPL). The company has evolved from a website checkout method to a full-featured digital wallet by partnering with credit card companies, banks, and everything in between. In addition, the company's peer-to-peer (P2P) payment system Venmo has been massively popular among millennials, helping vastly expand its addressable market. Because of this combination of offerings, PayPal is uniquely positioned to leverage its existing technologies to take advantage of the move away from cash.
Now one of the young guns in digital payments appears to be coming for PayPal.
Image source: Square.
The battle for P2P
Payment processor Square (NYSE: SQ), known for its equally square mobile card reader, has been adding a host of features to its own P2P system to entice users to download and use the app. Investors might be surprised to know that Square's Cash App doubled its user base in 2018, topping 15 million active accounts last year, up from 7 million to end 2017.
Even more important, downloads of the Cash App have been outpacing Venmo, and that trend is continuing, according to analyst Dan Dolev with Nomura Instinet. In a note to clients, Dolev revealed that Square Cash saw 6.3 million downloads in the first quarter, exceeding the 4.9 million for Venmo during the same period.
Cash "downloads remained healthy in March at 2.2 million, accelerating from 2 million in February," Dolev wrote. "This marks the fourth consecutive month of total monthly downloads above the 2018 average of 1.9 million. Venmo downloads also accelerated, reaching 1.8 million (versus +1.5 million in February)."
Nomura's app-downloads tracker shows this follows the trend from 2018, when Cash App saw about 1.9 million downloads per month, on average, compared with Venmo's 1.35 million. That amounts to total downloads of 22.8 million for Cash App compared with 16.2 million for Venmo last year.
Does this spell trouble for PayPal?
There are some nuances to the reporting that need to be addressed to fully understand the data. Looking at the first quarter on a comparative basis, Venmo grew downloads by 46% year over year, while Cash App downloads increased by 30% compared with the prior-year quarter. So, while Cash App had more downloads on an absolute basis, Venmo grew more quickly compared with the same time last year.
P2P is just one part of each company's overall business. Square's total revenue of $3.3 billion in 2018 paled in comparison with PayPal's $15.5 billion. Square is still unprofitable on a GAAP basis, losing $0.07 per share, while PayPal generated earnings per share of $1.71. The difference is even starker when considering the total payments processed. Square's payment volume was about $105 billion in 2018. While impressive in its own right, it's still only a small portion of the $578 billion transacted by PayPal.
It's also important to point out that this isn't a zero-sum game, and there will be more than one winner. There will be room for both PayPal and Square to succeed in the digital payments space.
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