Can Cash App be the world's best bank?
Maybe in the future, I won't have to give my money to Wells Fargo.
None of this is financial advice. Also, here’s a summary in case you’re too lazy to read.
Summary
The Innovator’s Dilemma lays out how established companies get disrupted by competitors with fewer resources. We’ve seen this play out with Cash App.
Cash App has a big advantage over banks: network effects. Cash App’s cost to acquire a new customer is $5. For traditional banks, it’s $1500.
Cash App is very popular in Southern states, where large parts of the population don’t have access to bank accounts.
Cash App is starting to become more popular than Venmo.
Already, Cash App can act as a replacement bank account with cool features like $200 loans and “Boosts” for your debit card.
Cash App can build even more cool features by embracing cryptocurrency.
Cash App giveaways
If you follow rappers on Twitter, you’ve probably seen at least one of them tweet out something like this.
This isn’t Travis Scott giving away his own money — this is a paid partnership with Cash App. It’s really a win for both sides. Travis Scott gets to reward his biggest fans and Cash App gets more people to download the app to claim their money.
As ARK Invest pointed out, these types of campaigns are very effective in helping Cash App get more users. The data shows that Cash App downloads are very closely correlated to the number of followers Cash App has on Twitter.
Of course, giving away free money on social media is just one part of Cash App’s master plan. Ultimately, it seeks to become a digital bank that can serve its users more efficiently than Wells Fargo or Bank of America ever could.
The Innovator’s Dilemma
To better understand how Cash App can disrupt established banks with more money and more resources, there’s a book we should look at: The Innovator’s Dilemma.
The Innovator’s Dilemma was written by former Harvard Business School professor Clayton Christensen. It’s all about how established businesses get disrupted. Its main thesis is that businesses don’t get disrupted because they’re lazy and complacent. What happens is that these businesses get so focused on serving their best customers that they ignore cheap technologies that serve low-value customers. These cheap technologies often end up improving rapidly, until they eventually become even better than the product they’re supposed to replace.
For an example of how this works, we can look at the auto industry. Car companies didn’t want to waste time building electric cars when there were only a few hippies who were asking for them. However, Tesla came along and started selling electric vehicles. Now, Tesla is at a huge advantage. Electric car batteries are improving rapidly every year, which means that soon enough they might be faster and cheaper than gas-powered vehicles. Traditional car companies are trying their best to catch up to Tesla’s early lead.
This same dynamic has played out in the online payments space. Back in 2014, Cash App was just one year old and the mobile payments ecosystem was still very small. It seems ridiculous now, but back then, managing money through a mobile app was still a very new idea. I was a freshman in college back then, and many of my friends in the dorms didn’t want to download apps like Cash App and Venmo because they were scared of getting hacked and losing all of their money.
Back then, Cash App and Venmo were tiny applications that were in no way a threat to banks. Now, Cash App and Venmo have more than 100 million users put together and they’re adding new customers faster than the banks are.
The difference that network effects make
Back in 2018, JP Morgan tried launching their own payments app targeted towards Millennials called Finn. It had real benefits — there were no overdraft fees and access to 29,000 ATMs. Still, the app wasn’t successful. It was shut down within a year.
There’s a reason why Finn didn’t work out. Apps launched by traditional banks tend to focus on the typical features you’d expect from a bank like being able to withdraw and deposit money. However, applications like Venmo and CashApp focus instead on a totally different angle: making payments to friends and family. That means they can grow faster through network effects.
It works like this: when you go out to dinner with your friends, it’s not always possible to split the bill. What happens is that one person usually ends up paying and then asks the other people to pay them via Venmo or Cash App. At that point, everyone in the friend group who doesn’t have the app is forced to download it. If one of them refuses, that person will look like a complete douche.
Network effects mean that payment apps have a huge advantage in terms of growth. It’s estimated that for traditional banks, the cost to acquire a new customer is $1500 because they have to invest in things like Facebook ads and email marketing. Cash App’s cost to acquire a new customer is just $5. That’s why Cash App is growing so much faster than banks like Wells Fargo.
How payment applications are serving low-value customers
Remember, disruption comes when established companies ignore cheap technologies. JP Morgan’s highest-value customers are probably old Boomers who’ve invested millions of dollars with their wealth management services. These people are probably not that interested in Cash App.
Instead, Cash App aims to serve Americans that have been shut out of the traditional financial system.
It’s estimated that 25% of the American population is either unbanked or underbanked. That means they either don’t have a bank account or rely on “alternative financial institutions”, which include predatory payday lenders that charge customers absurdly high interest rates.
Minorities disproportionately make up the unbanked and underbanked population. It’s estimated that half of all black households fall into this category, which helps to explain the racial wealth gap.
Banks made no attempt to reach out to these communities because it simply wasn’t worth their time. However, since payment applications like Venmo and Paypal have such low customer acquisition costs, they’re able to easily reach these users. That’s part of the reason that you see much collaboration with hip-hop artists. It’s part of Cash App’s strategy to reach the underbanked black population.
So far, the strategy has been working great. According to ARK Invest, searches for Cash App come disproportionately from southern states with high unbanked or underbanked populations. Many of the users from these states seem to be using Cash App as a replacement for a bank account.
What about Venmo?
I’m sure some of you have a question.
Hey idiot, why are you focusing so much on Cash App and not Venmo, which has way more users?
It’s true: Venmo does have more users. At the end of September 2020, Venmo had 65 million active users while Cash App had 32 million. However, Venmo is for the most part focused on sending and receiving payments and not much else. On the other hand, Cash App has significantly more features — users have the option to buy and sell stocks and give users the ability to make direct deposit payments. Theoretically, someone could manage all of their finances on the app, so it’s more of a “digital bank” than just a payments app.
In addition, Cash App has overtaken Venmo in terms of search volume, partially because of the social media campaigns that Cash App runs with celebrities.
Venmo seems to realize that they’re facing real competition from Cash App, which is why they’re adding more “digital banking” features. Just a couple of months ago, Venmo added the option to buy and sell cryptocurrencies.
How Cash App is catching up to traditional banks
At this point, Cash App’s functionality is still very limited compared to banks. Unlike banks, the money you have on Cash App is not FDIC-insured, so you could lose it all if Square ever goes bankrupt. You also don’t earn any interest on the money you have in the Cash App.
That’s part of the reason why Cash App isn’t beating traditional banks just yet. In 2020, the app made $4 billion in revenue. It’s good money, but it doesn’t come close to the $72 billion that Wells Fargo made that same year. However, Cash App is making some interesting moves to serve customers in ways that traditional banks can’t.
Loans: Last August, Cash App started offering users the ability to take out small loans ranging from $20 to $200. It’s a first step towards making Cash App a full-service digital bank that may be able to offer larger loans to customers in the future. It’s also great for Cash App’s low-income users. If they’re in need of some extra money to pay utility bills, they don’t need to go to a payday lender that charges excessive interest — they can just turn on their phone and go to Cash App.
Cash Card: Cash App offers its own debit card, the Cash Card. Customers have the option to get “Boosts” inside the app, which gives them deals and discounts. Cash App is then able to collect data on which “Boosts” helps boost user engagement the most.
How can Cash App become better than banks?
Small loans and debit card rewards are cool, but they aren’t exactly revolutionary ideas. To truly disrupt the banks, Cash App can make a move that Boomer-led institutions would probably laugh at: embrace blockchain-based technology. It makes sense considering that Cash App’s parent company Square was one of the first publicly traded companies to buy Bitcoin and CEO Jack Dorsey is a huge advocate for the cryptocurrency space.
A few months ago, Square bought the music streaming service Tidal for $297 million. This move caused a lot of confusion. After all, it makes no sense why a financial company would want to waste its time with a streaming company that doesn’t even make money.
Many people speculated that Square CEO Jack Dorsey’s long-term plan was to offer NFTs for musicians. Maybe in a few years, Cash App users will be able to invest in NFT songs from their favorite artists the same way they’re able to invest in stocks right now. It could be a great way to help people who aren’t interested in the stock market make their first investments. It would make perfect sense given that Cash App already does so many social media promotions with hip-hop artists.
But that’s not the only way Cash App can leverage crypto. In the past, Jack Dorsey has spoken about how decentralized finance can help support underbanked populations. While Cash App doesn’t offer any interest right now, in the future it can integrate with decentralized finance protocols like Yearn that offer higher interest rates than any bank.
If Cash App is able to pull this off, it’s going to be able to offer two things that traditional banks can’t: high interest rates for savers and access to alternative forms of investments.
At the same time, Cash App will be using its capital more efficiently than traditional banks. Earlier, we talked earlier about Cash App’s low customer acquisition cost. We also have to remember that Cash App has an additional advantage: they don’t need to pay rent for physical locations. ARK Invest estimates that the cost of an individual bank branch is around $550,000. That means Cash App has more money to spend on adding cool features and delivering a great user experience.
In conclusion
If Jack Dorsey can pull it off, my children might never need to go to a Wells Fargo physical branch to open up a bank account. Instead, they’ll be able to start building their savings on Cash App with just a few clicks.
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