Square launches payroll feature that could boost its banking business through the Cash App

Jack Dorsey, chief executive officer of Square Inc., second right, tours the floor of the New York Stock Exchange (NYSE) in New York, U.S., on Thursday, Nov. 19, 2015.

Yana Paskova | Bloomberg | Getty Images

Square is letting workers access some of their earned wages ahead of schedule, which could add fuel to the company’s recently booming banking business.

San Francisco-based Square on Tuesday launched “On-Demand Pay,” which lets those using Square for payroll give employees up to $200 of a paycheck ahead of the normal biweekly schedule. Those funds can be funneled directly into Square’s popular mobile account, the Cash App. 

Square, run by Twitter CEO Jack Dorsey, also announced an “instant payments” feature, which lets businesses fund payroll immediately using money in their Square balance, instead of waiting to pay through external bank accounts. 

Square’s general manager of Payroll, Caroline Hollis, pointed to the decline in cash tips at restaurants as one reason for the product launches. As cash becomes seen as a potential germ-spreader, “a lot of money movement is now happening digitally.” 

“We’re solving for cash flow,” Hollis told CNBC  in a phone interview. “If you work at a restaurant, cash tips used to be one of the biggest portions of your wages, and that has really dropped off.”

Both products incentivize users to sign up for direct deposit through Square’s Cash App. Those who opt to get paid via Square’s mobile accounts can get their funds within minutes, while linking an external bank account could take a matter of days and incurs a small fee.

“It’s much easier to use Cash App versus having to go and look up your account and routing number information,” Hollis said. “You get paid sooner if you pay out via Cash App — we’re able to do that because we own both sides of the transaction.” 

Square’s growing banking business

Square’s seller ecosystem has taken a hit during the pandemic as small businesses were forced to shut their doors. But its Cash App — which offers direct deposits — has taken off in the other direction. Analysts point to optimism around the Cash App as the key reason for Square’s 130% stock rally this year.

Square’s peer-to-peer app was originally seen as a competitor to PayPal’s Venmo. It also offers direct deposits, a debit card for spending, and unlike PayPal offers equity and cryptocurrency trading. Cash App saw “meaningful uplift” from users depositing government stimulus checks, CFO Amrita Ahuja said on a call with reporters after its last earnings release. Unemployment checks and tax refunds were also “tailwinds” that drove momentum in the app. 

“Until the Coronavirus crisis, Cash App really hadn’t been on the radar for many investors when they thought about Square,” said Max Friedrich, analyst at ARK Invest. “That changed through the crisis — Square’s main business stopped and all eyes focused on the Cash App.”

The Cash App was the star of Square’s last quarter, with gross profit for the app rising 167% year-over-year to $281 million. Stored funds, or the amount of money customers keep on the app, jumped 86% from the prior quarter. The app had 30 million users as of June, up from 24 million at the end of last year, according to the company. 

Lisa Ellis, fintech analyst and partner at MoffettNathanson, said Square’s value as a two-sided network — owning both the seller side and the consumer side with Cash App — is a “game changer.”

“That is the Holy Grail of payments,” Ellis said. “If you can build a two-sided network then you get a very deep competitive moat. Investors are excited about Cash App for that reason.”