Although many view payment via smartphone as the future of digital payments, both online and at the point of sale, some digital payment leaders now seem to be taking a step back from the digital revolution. They're enlisting a seasoned veteran of the war on cash: plastic.
PayPal Holdings Inc. (NASDAQ: PYPL) and Square Inc. (NYSE: SQ) have discovered that, to win new customers and increase user engagement on their payments apps, they must offer more than just peer-to-peer (P2P) payment options, easy online checkouts, and in-app purchases.
Their solution? Offering credit and debit cards linked to their accounts.
The result? Increased user engagement, new customers and a platform that looks and feels more and more like a real bank account.
Both PayPal and Square are issuing debit cards linked to their apps' accounts in an effort to boost user engagement and win new account holders. Image source: Square Inc.
Square's Cash Card Paves the Way
In 2017, Square introduced its Cash Card, a debit card that could be linked to its popular Cash App. In May, Square launched Cash Boost, a rewards program for the Cash Card. Cash Boost incentivizes cardholders to use their cards more by offering cash back when they make purchases at merchants, such as coffeehouses and restaurants. What makes the program special is that it comes with no annual fee and is attached to a debit card, not a credit card. While the company does not give monthly updates, it said that by June 2018, just one month after the launch of Cash Boost, spending on the Cash Card had jumped to $250 million, triple the payment volume the card saw in December 2017.
Along with some of its other features, like the ability to make direct deposits or pay Caviar food-delivery drivers instantly, Cash App is looking more and more like an alternative to bank accounts for the underbanked. And, as fellow Fool.com contributor Adam Levy succinctly puts it: "[T]he Cash Card is what makes it all work. An account to receive and store money isn't all that useful if you can't use the money to shop or pay your bills."
PayPal's Different Card Options
PayPal has long offered a credit card associated with its core platform. Its current offering, the PayPal Cashback credit card, offers 2 percent cash back on all purchases with no annual fee, but it wasn't until Square launched its Cash Card that PayPal began looking to expand its offerings.
Earlier this year, in conjunction with Mastercard Inc. (NYSE: MA), PayPal launched its new prepaid PayPal Cash Mastercard, which combines many features of prepaid and debit cards. The card is available for purchase at retail locations, can be activated with as little as $10, and requires no minimum balance. Once it is linked to a PayPal account, it can carry much higher balances and acts more like a debit card. The card comes with no monthly fees, can be directly funded from a PayPal account, and can be used anywhere Mastercard is accepted. It also accepts direct deposit of users' paychecks, tax refunds and other payments from the government (like Social Security benefits).
PayPal's Venmo, the payments app popular with millennials, is also launching a new card. The Venmo card is a debit card that is linked to users' accounts and runs on Mastercard's network. It is still being rolled out, and many users who want the card must sign up for a waiting list (although the company promises it will soon be available to all users). While PayPal has been working diligently to enable Pay with Venmo, a feature that will allow account holders to use their accounts to make purchases at participating merchants, the card opens up a whole new world of transaction possibilities.
Why This Matters
When PayPal launched the Cash Mastercard, it specifically called out the 30 million consumers in the U.S. who are financially underserved and spend almost 10 percent of their wages on "alternative financial services," according to the federal Office of the Inspector General. Many of these people are immigrants, the Inspector General reports, making PayPal's integration of its accounts with Xoom, its international remittance platform, especially meaningful. These 30 million U.S. consumers represent a huge opportunity for both digital platforms to gain new users.
In addition, the cards should increase user engagement. We already saw how payment volume has tripled on Square's Cash Card since last December. The company also reported that Cash App was increasing in popularity and that it was the most downloaded financial app in the second quarter. When PayPal reported its second-quarter earnings, one of the numbers that stuck out the most was the accelerating growth in user engagement. Account holders are now using PayPal to facilitate 35.7 transactions per year, a 9 percent increase over 2017's second quarter.
Both companies credited their cards for driving their platforms' growth. In Square's second-quarter conference call, CEO Jack Dorsey, referring to Cash Card, said, "It's early, but we're seeing a lot of resonance that gets us pretty excited about its future."
In PayPal's second-quarter conference call, the PayPal Cash Mastercard and Venmo card were some of the reasons CEO Dan Schulman cited for increased user engagement. "We are quite pleased with the surge of initial demand for the Venmo card," Schulman said.
Winners Keep Winning
PayPal's and Square's introduction of debit cards looks like a big win for both companies. There's a huge pool of potential new users for the cards, whose features could increase engagement with the two platforms.
And they might not be the only winners. Mastercard and Visa Inc. (NYSE: V) are acting as the payment networks behind PayPal's and Square's debit cards, respectively. This could be a catalyst for those two credit card companies as underbanked consumers are introduced to digital and card payments through the two platforms.