Square is beating Coinbase on low-value bitcoin purchase fees, but that’s not its only bright spot

Square, the payment processor unicorn led by bitcoin believer Jack Dorsey, reported yet another record-breaking quarter of bitcoin purchase volumes ($148 million) within Cash App. 

According to analysis by The Block, while bitcoin volumes still pale in comparison to larger U.S. retail crypto exchanges, the surge in bitcoin demand at Square (18% Q/Q) grew at a larger clip than Coinbase (15% Q/Q), Gemini (-.80%), and Kraken (3.4%) in Q3. For relative comparison, Square's bitcoin volumes in the third quarter were ~2% of Kraken's BTC volumes, ~6% of Gemini's BTC/USD volume, and ~1% of Coinbase BTC/USD volume.

Outside of volumes, arguably a better measuring stick for retail consumers pondering where to buy bitcoin in the U.S. comes down to fees, ease of use, and other product capabilities. In regards to the former, earlier this week Square updated its transparency surrounding the spread to buy or sell bitcoin within Cash App; opting to list out how much consumers are spending in fees. The Block tested purchases of $10, $25, $50, and $200 within Cash App, and found that Cash App fees are significantly lower than equivalent purchases on Coinbase that are under $50 (retail, not Coinbase Pro). For purchases of $10, Coinbase fees net out to be more than 5x the cost.

Source: Coinbase, The Block, Square Cash App Test Purchase

The lower fee structure on lower-value bitcoin purchases plays into the broader Cash App strategy of serving consumers that may be financially under-served in the market. Notably, the greatest search interest for Cash App according to Google Trends appears to be coming from states with the highest rates of unbanked (those without basic checking accounts). Even more impressive is the fact that the Cash App is getting more search volume than PayPal's Venmo in these same regions (h/t to Ark Invest for pointing this out).

Source: 2017 FDIC National Survey of Unbanked

The ability to purchase bitcoin is also but one of many features that have now been rolled into Cash App and aimed at providing greater financial access, most recently including the ability to purchase fractionalized shares of public companies.

"We wanted to solve a much bigger problem we saw. Most people can't even afford to buy one share of a company they want to own. So, we took everything we learned from bitcoin and fractionalized the stock market," said Dorsey on the call.

Dorsey later added that being able to purchase bitcoin, and now even fractionalized shares in public companies, are some of the reasons why Cash App has not only seen continued impressive growth in active users, but also a way to differentiate against the saturated "Neo-bank" market. Recent estimates by ARK Invest place Cash App monthly active users at close to 25 million, which if accurate, would be above PayPal's Venmo monthly active user base and almost an order of magnitude greater than Coinbase's monthly active user base, according to one source.

"Some people come to the Cash App because it's the easiest [and] fastest way to buy bitcoin and that allows for us to show them the other attributes it offers as well, including sending and receiving fiat money, storing money, getting a Cash Card that they can use anywhere Visa is accepted or go to an ATM to get paper cash out," said Dorsey.

"In terms of fractional shares and what futures are coming, we're really excited about this feature. As I said, we think it's pretty transformational and we do believe that this gives access to a part of the financial system that most have been left out of."

The ability to cross-sell into other products, such as stock trading and traditional banking services, is something that other U.S. based pure retail crypto exchange apps like Coinbase are currently lacking. Square noted in its 3Q Investor Letter that the redesign of the Cash App to include shares trading had helped to drive approximately "double" the first-time Bitcoin buyers within Cash App within the 30 days following the redesign.

Source: Square 3Q Investor Letter

One of the more obvious use cases for crypto has always been trading, and it's not just core crypto exchange businesses that have taken notice. Fintech discount exchanges, wealth management platforms, and even more traditional financial services companies are in on the secret that one of the easier ways to attract first-time investors into the market, and more importantly build goodwill with the desired millennial demographic, is by offering digital asset purchase capabilities in addition to other core offerings.

Dorsey has indicated on prior calls the firm is moving quickly to ensure "quality" for its customers, stating, "Bitcoin for us is not stopping at buying and selling, we do believe this is a transformation technology for our industry and gives people more access to the financial system, so we are going to have a learning mindset and ensure we are learning and leading the industry from here."

Resources

Square - Q3 Investor Letter