Cash App, Venmo, Digital Wallets and Challenger Banks with ARK Invest
Max Friedrich is a fintech analyst a ARK Invest, a public markets investment manager focused on disruptive technologies including autonomous tech, robotics, fintech, genomics and next generation internet.
Max recently published a report on digital wallets, including Venmo and Square’s Cash App, which is available for download on ARK’s website.
I loved this conversation, which could have been twice as long as it was, and I hope to continue exploring this topic in the future.
We're also joined by Lex Sokolin, author of the Fintech Blueprint.
For all of our past episodes and to sign up to our newsletter, please visit www.rebank.cc.
Thank you very much for joining us today. Please welcome, Max Friedrich and Lex Sokolin.
Full transcript:
Will Beeson:
Hello, and welcome to Rebank, I'm your host, Will Beeson. Today we're joined by Max Friedrich and Lex Sokolin. Max is a fintech analyst at ARK Invest. A public markets investment manager focused on disruptive technologies, including autonomous tech, robotics, fintech, genomics, and next generation internet. Max recently published a report on digital wallets, including Venmo and Square's Cash App, which is available for download on ARK's website. I love this conversation, which could have easily been twice as long as it was. And I hope to continue exploring this topic in the future. For all of our past episodes, and to sign up to our newsletter, please visit rebank.cc. Thank you very much for joining us today. Please welcome Max Friedrich and Lex Sokolin. Max Friedrich. Welcome to Rebank.
Max Friedrich:
Thank you for having me.
Will Beeson:
Lex Sokolin, I'm glad you're here as well. I think I would have a much more difficult time engaging Max on some of the super deep dive stuff on my own. So glad you're here joining as well. It's great to talk to you.
Lex Sokolin:
Absolutely. I'm glad to represent the nerd contingent in this conversation.
Will Beeson:
Excellent Max, maybe to kickoff, you are fintech analyst at ARK Invest, at the phenomenal firm and an amazing resource from an intelligent content standpoint. And you recently put out a report on the Cash App and Venmo and digital wallets in general. And got into a little bit of digital wallets versus challenger banks. I think there's a very ripe conversation to be heard here, not least as we look at direct government payouts to consumers, and the problems that remain with unbanked and developments in payment networks in the U.S. Hopefully an eventual shift from one to two day lag with ACH to a real-time payment system, and all of the user experience implications around that. But before we dive into the full conversation, maybe you can quickly introduce yourself and ARK Invest.
Max Friedrich:
Sure. So ARK Invest is a management firm based in New York, we're a public equity investor long only. So we have a five year time horizon which differentiates us from other investors. So, obviously, we also look to quarterly earnings, and do all the bottom upwork, but in essence, we would like to focus on the long-term and to identify long-term technological trends. And we offer products to consumers, to retail investors via ETFs, as well as other fun constructs for institutional investors and have around $13 billion I think now in AUM. And together with George Woodridge, I cover fintech at ARK, and mostly focused on the payment space, and what we call digital wallets/challenger banks. And also try to keep an eye on what's happening in the venture capital space as well. Although we don't invest it privately, like I mentioned. And my colleague George's focus more on the lending side, and some other topics. So that's kind of our split.
Will Beeson:
Excellent. Well, I'm almost surprised that we haven't connected before now, it just sounds like we have a lot of areas of overlapping interest, but better late than never, and it's great to have you on today. So maybe to dive in, we can start by just defining what you mean by digital wallet. So again, you recently published a report which is available on your website, the ARK Invest website, which everyone should check out. How do you define a digital wallet?
Max Friedrich:
So we define a digital wallet as a mobile application on your phone that gives you access to different consumer financial products, but potentially also broader commerce product. So the kind of thing to think about first would be WeChat Pay in China and Alipay which have these amazing ecosystems of built-in MiniApps, and wealth management, and all these different applications. Now, due to several reasons, it's kind of unlikely that exactly that blueprint, WeChat Pay will be replicated everywhere around the world. But generally, we think that really across the world, consumer finance is going to move more and more to the phone into mobile applications. And then it kind of becomes the question. Okay, how many products are you offering? And, how can you differentiate yourself from other digital wallet players?
Max Friedrich:
I think we'll touch later on, for example, the peer to peer payments that Cash App offers, that is a differentiator towards other challenger banks, which in our view, would also fall in this category, but just, also little bit differentiate because they don't have those peer to peer payments, so their customer acquisition might look different. So there are kind of nuances to it but generally, it's mobile applications on your phone, where you can access different consumer financial products.
Will Beeson:
I like to report because there's been talk about digital wallets for the past few years. And it's virtually always focused on the Chinese super app model, and in QR code base payments, which you mentioned, which has been a genuine revolution in the most populous country in the world, phenomenally important. But the relevance hasn't felt particularly high for more developed markets or markets like the U.S. I guess I meant developed from a financial infrastructure standpoint. So question mark as to whether the U.S. falls into that category. But, where paying for things hasn't been a huge challenge, like accessing money in a bank account and then paying for goods and services quickly and in reliable ways hasn't been a big challenge, at least with the prevalence of Visa and MasterCard.
Will Beeson:
So you will be intimately familiar with all of the work in Asia around digital wallets and kind of where this concept comes from. As you look at the application of the concept in markets like the U.S. again, where the report is focused, and maybe Europe as well. Can you just talk about what the most relevant use case for digital wallets appears to be in developed countries?
Max Friedrich:
Sure, so from a very broad perspective, I think there is a huge market potential for just generally young people that are not satisfied with the banking experience, that connect their bank, not really with a positive connotation. And you can offer those people something cheaper, better, more flexible in a slip mobile app. Especially, in the U.S., you have a large unbanked population, which I think we'll probably touch on later with Cash App and also chime over 20 million people. If you go into the underbanked category, they're even 60 million people. And you can offer those people better, cheaper products, too. From a broader perspective, again, everything has been moving online, has been moving digital, has been moving on the phone, but we really haven't seen that yet with finance.
Max Friedrich:
I think that's just a very broad trend. Obviously, it can be stronger, like you said, in developing nations, where you don't have any infrastructure. So there is no credit card that you have to kind of build your product around or something, you can directly build your product and we will often be the first consumer financial product that these folks and under developed nations use, but still in developing countries, I think you can still offer better user experience, a cheaper product. And you can build a product that people actually like to use, like young people normally don't really like to go to a bank branch. And if you look into all the statistics, surveys from consultancies and the FDIC statistics, it's basically that bank branch usage is going down, especially for young people, but really across generations, but especially for young people.
Max Friedrich:
And with something like Cash App, I think, especially Cash App, but also, other challenger banks that offer slick products, you can actually build a connection to these users, and these users actually enjoy using the product. If you look at Cash Apps, marketing campaigns, recently they partnered with Spotify, so you can through Cash App support your favorite artist, they partner with other rap artists, strong into urban culture, they partnered with Burger King to pay for people's student loans. So you see you can get more creative and actually build a bond to user base so that people actually have a positive connection to your product. And I think that's something that we haven't really seen yet in finance, pretty boring industry. But with those digital wallets and challenger banks, that's, not possible.
Lex Sokolin:
So, let me push a little bit, because definitely hear the argument of like, "Oh, man, finance sucks. The banks are on fire. Tech is cool." But I'm sure you hear all the time from the large financial institutions, and when I was at autonomous I heard this all the time too, where JP Morgan's got an app. They invest hundreds of millions into it. And if you ask them how many digital users they have, they'll say a third of our footprint, which is going to be larger than a whole bunch of the Neo banks. If you ask Santander or Barclays or BBVA, they're all going to say we've done nothing but focused on customer experience and user experience and build out cool apps. And they've launched over and over and over again, things that resemble and are supposed to feel like mobile wallets.
Lex Sokolin:
And then on the other side, you of course have Apple Pay and Google Pay. In 2020, it all feels very samey to me, like, oh, here's another interface with big fonts and a tracking of your transactions. And whether it comes from JPM or whether it comes from Apple. Like, why do I really care? Why would I? How are they different at all?
Max Friedrich:
Yeah, I definitely hear your argument. And I think that there are voices that, say that the challenger bank space might be a little bit overvalued, I might count myself to one of those voices as well, because I think that Square's Cash App is such an overlooked phenomenon. Yeah. So to also push back a little bit against your argument, we have seen a bunch of failures from the banks as well, right? So you have to shut down after they acquired like, a few 10,000 users in like six months and spent 100 million, completely mind boggling, and you have to shut down of Finn by JPMorgan Chase.
Lex Sokolin:
So I agree with you. I totally agree with you, and the question is, why? What is it at the root of this, like... The thing looks the same but really isn't at its heart. What do you think is at the heart of the success of things like Cash App or Venmo? Why?
Max Friedrich:
Yeah. So I would say that still the user experience even if the big banks are trying to replicate it, and try to put kind of millions and millions into it, I think that you can make the argument that the user experience is superior, if only slightly, and then I would kind of open the bigger picture, and say, what could these challenger banks, but actually, I would like to focus more on Cash App and potentially Venmo, but especially Cash App kind of grow into. So just for the example of Csh App, because I think they're really uniquely positioned amongst all the challenger banks. They're doing with their debit card, something called boost. So they have a rewards program, where right now they sponsor discounts themselves, but basically you get instant cash back on different purchases.
Max Friedrich:
On grocery store purchases, for example, Nike and other kind of brands that they select. They could build that part into an advertising platform for merchants. They could also do something interesting, which is connecting their merchant base of square point of sale merchants around the U.S. and potentially also internationally at some point, with their Cash App user base. So they could actually build closed loop network at some point. Venmo is trying to do the same thing. I think Venmo isn't pushing as aggressively in the banking direction as Cash App does. But those are opportunities that banks, they actually have to admit at some point JP Morgan Chase also shut down JP, I think JP pay or something, what they called the payment solution, the in-store payment solution, but those are all opportunities that the big players, let's say the banks really couldn't access.
Max Friedrich:
I think you can make another argument about big tech, right? We hearing about Google getting into the game has been a little bit quite around Amazon, but obviously Apple with their Apple Card partnership with Goldman Sachs. I think Google is maybe one of the more interesting names in that space. We've also heard a partnership from Samsung Pay. So that would also mean big distribution. So I think you can make the argument that just by being very narrowed, banks don't really have the opportunity to go as wide as some of these other players can go, especially Square with Cash App can go. I think you can make also another argument that maybe it's also just not in their DNA for the big banks, because they have been investing in technology and kind of making their apps look nicer for the last years, like several years now, right?
Max Friedrich:
You had this talk of bank CEO saying, we're a technology company already in 15, 16. But since then, challenger banks around the world have attracted tens of millions of customers. But yeah, like I said, I hear your point. And I think especially on the valuation side, there has been a lot of, a lot of money flowing into late stage venture capital as a whole. So I think we'll see some consolidation. But I'm sure that, besides Venmo and Cash App, there will be other challenger banks kind of left at the end. And they probably will have built a very large user base, but I can hear your point.
Will Beeson:
In my mind, the reason that Venmo and the Cash App. So let's just set aside the terminology digital wallet, because that's probably just confusing more than anything to the average listener, let alone user of these apps. The biggest benefit is that, like with Venmo, specifically, it solves the problem of peer to peer payments, which doesn't otherwise exist in the U.S. Like, you can't just type in someone's account number and routing number in your mobile banking app and send them three dollars instantly. The way you can in the UK with faster payments, the way that largely, like maybe at Iband based you can, in the SEPA area. Maybe it takes a bit longer in Europe, but it's still, like account to account payments from one institution to another.
Lex Sokolin:
But Zell, all the banks will be like, but Zell has three times the Venmo volume and blah, blah, blah, right? Why is that? Why don't they get credit for for Zell.
Will Beeson:
I think that the reason that Venmo and Cash App are so relevant and have scaled so quickly is because it's not the same sort of all or nothing pitch that incumbent banks and digital banks offer. We're not talking about shifting your banking from institution number one to institution number two, with all of the cognitive load and potentially complexity that comes along with that, we're saying, keep your banking exactly where it is. But here's a free and very intuitive, oh, and by the way, cool way of sending money to your friend. And it's much easier to scale a customer base, especially if they're on social media platforms like Instagram and Twitter, when that's your pitch than it is, hey, scrap the bank you've been using for the past 20 years and start to entrust us with all of your income and cash flow.
Will Beeson:
That definitely is the reason why these companies have gotten scale more quickly. And then I think the other question which is worth talking through a little bit is the operating model/economics of these platforms. Because to run a challenger bank, like if you're N26 or Monzo, you have a banking license, you have regulatory capital, you have a compliance function, you have a lot of infrastructure and an operational overhead required to offer than a very low cost, low margin product to users. If you're effectively a payments platform, like it's PayPal 2.0. It's like a single account at an institution with a bunch of subledgered accounts sitting underneath them that allow just by modifying ledger entries, instant account to account payments.
Will Beeson:
The infrastructure required to run that, the AML and the KYC considerations are much lower, because you're effectively pulling customers in, via linking their bank accounts. i.e. they've already been on boarded by these financial institutions and you're using something like plaid to connect it across. The operational overhead and the cost of running that it's just much lower. So acquire customers with something that's easy, where the bar is low, i.e. the hurdle is low for them to start using your product. Onboarding is easy, the cost of operating it is largely lower on for like basis. And then, there's scope to expand the products that as you've seen these guys do with debit cards with I don't know, like cash management with investments, Bitcoin trading that offer more and more value to users over time, but don't ask them to shift on day one to your institution on a wholesale basis. Max, would you agree or disagree with that analysis.
Max Friedrich:
Yeah, I think that's a great perspective, especially from the customer acquisition and then upselling perspective. And we've seen this in our data. Like if you look at the user acquisition of Venmo, the daily signups, those spike around August, September when cold starts in the U.S. So you basically have free user acquisition because all these people are getting together at college. They might move together into the dorm, so they have to split, I don't know utility payments or other partial payments, they go out together, they form these social circles, which actually we found are pretty sticky, so we see actually, people coming back to the platform, even after weeks or months of inactivity. That's also true for Cash App, although there are some demographic kind of nuances between the Cash App user base and the Venmo user base.
Max Friedrich:
But generally, acquiring these customers cheaply. And then offering, like you said a debit card. Introducing them to equity investing. Introducing them to Bitcoin. Actually offering them routing account numbers via partner bank, potentially. And now we are kind of look into the future, monitoring those paychecks that are coming in and all the other data, and using all that data to underwrite consumer lending products. That is very, very interesting value proposition that I think, especially for Cash App, also differentiates itself from first of all, the bank value proposition where, okay, we're giving you this app where you can check your balance, and it kind of looks cool, but also, it's kind of clunky.
Max Friedrich:
And the challenger bank, via a proposition which is like, okay, you get your paycheck two days earlier, in the case of chime, which Cash App, just as an example also does, but doesn't really advertise as much, or in Europe, we can give you a cool looking black card, and whatnot. But I guess, Europe also is a little bit different, because from the unit economic perspective, there's not as much to get for interchange revenue. So the business model is more fee-based or membership based. And in the U.S., you can really do this interchange arbitrage, which I think is also super interesting to think about that. But yeah, those are kind of the interesting things, I think.
Lex Sokolin:
A lot of these things are five years out blending into the same outcome, and you might be leaning a little bit more into one thing, or a little bit more into another thing and I think that works with different success in different markets. If you look at Cash App, they're two things to me that just really stand out and I'd love your view on it. The first is, and you mentioned this a little bit, is there just like fantastical market growth and adoption? And so, is there something they're doing in terms of virality that allowed them to catch up to Venmo at 3x, the growth rate, and is there something around the cost of customer acquisition? Or, like you said, how they're targeting people or sort of where does that come from?
Will Beeson:
Crypto trading. It's always crypto trading.
Lex Sokolin:
Yeah, Bitcoin trading. And then number two is, what I think is the kind of hidden asset, is the merchant footprints, and the actual stuff that square does. How do you think that will help them build out the business?
Max Friedrich:
Yes, on the first point, I think if you want to put it into one sentence, they've been able to become part of culture. And that kind of goes into the direction that I've been talking about earlier, where users actually kind of like using the product and enjoy it, seeing it on social media and so forth. So Cash App from the start has made some important product decisions, and then also really has been going heavily into marketing. So I think one of the most important features of Cash App is the cash tag. So that's the Cash App user name, a Cash App's users and name. So it's kind of this dollar sign, and then whatever letters you choose after that, your name, or whatnot. So that actually makes it super easy to send each other, another person money, and you can also post that cash tag anywhere you like on the internet.
Max Friedrich:
And that actually turned out to be a super important feature for them kind of later on. So they launched that feature, I think in 2015. And then what they did, I think in 2016, or '17, they started to partner with, I would say, broader category influencers. So with artists, rappers, different celebrities, and also brands. And what they did is they started to do giveaways. So they would hand the artist, let's say $100,000, for example, that was with Travis Scott. And then Travis Scott said on Twitter, hey, fans, I have $100,000 to give out via Cash App, and you have to post your cash tag, and then I or probably rather Cash App will send you that money. So you have this interesting situation where it's like a win win win situation. So it's great for the fans to have this positive experience with their artists.
Max Friedrich:
It's kind of identity building, and they actually get money from their artists they think or from the brand that their artists partners with. It's great for the artists because he or she can build a deeper connection with their friends. And then it's also great for Cash App, because they can acquire users rather cheaply. We think on average is below $20. Whereas banks sometimes spend up to $1,000 per customer. Spend relatively low sum to acquire a user. And then what might be also happening is by targeting those specific communities, so for example, the fans of a rapper, you're inserting yourself into, often tightly knit community where the fans might know each other and they're actually spreading the product even more and more and more people start to use it and so forth. So from the idea, it's not that revolutionary handing out money, right?
Max Friedrich:
It's the same thing that people did 10 years earlier, or even 15 years earlier. But I think Cash App is applying that method really, really effectively, and they've kind of gone from that to partner, for example, also with e-sport game, so with an e-sports team called 100 thieves, where they're sponsoring their, what's called compound or their training ground, and they're now on Twitch, and they're again, partnering those specific communities, which I think maybe you can also make an argument about, in the case of gaming. So it's pretty interesting because you're basically capturing those young people, when they're 16 to, I don't know, 25 when they're really passionate about these things, kind of catching them at the beginning of the financial journey, where they might not have a deep connection with a bank or so forth.
Max Friedrich:
So they might be more open to also open a checking account with Cash App, or start investing or start buying Bitcoin. And when you do that, obviously, if you have a couple of hundred or thousand dollars in a stock portfolio in Cash App, or in a Bitcoin laying around in Cash App, [inaudible 00:29:06] much less likely to switch over to another provider at some point. So it's very interesting from a stickiness perspective, I think. And then I just wanted to touch on the second point that Lex was talking about in terms of the two ecosystem that square has with the merchants and the Cash App. Because I think that's where it gets really interesting, and where, I think Revolute also has said in the past, that they are trying to build this two sided network. And obviously, we've seen many examples of this in China with Alipay and WeChat pay.
Max Friedrich:
But also, for example, in Indonesia, I think, Gojek just acquired one of the largest point of sale companies there. So they're also following that vision. But in terms of the western world, there really are not many companies that even have the possibility to build a two sided network as Square does. So Square obviously started in 2009 selling a point of sale hardware. So they have around three million or so, a little bit more probably merchants in the U.S. And then they've also built-up this consumer ecosystem with the Cash App with 24 million active users as of December, 2019. That probably grew towards 30 million as of now, these are monthly actives, they probably have maybe even between 50 and 100% annual actives more than those roughly, let's say 30 million monthly actives.
Max Friedrich:
So they could do really interesting things with those two ecosystems. If you listen to the earnings call of Square, they actually talk about that a lot. You hear Jack Dorsey talking about that a lot, because he kind of wants to bring across the point that this is something unique, but they haven't in the past really gone into the merger of these two ecosystems. One hint that we saw, and we can use that as an example, in recent weeks is that they're starting to merge the loyalty program of Cash App with Square. So Square's loyalty program rather merging that with the Cash App. So right now if you go into a coffee shop, Square merchant coffee shop, the coffee shop potentially has a loyalty program that Square enables. So that loyalty program would be tied to your credit card, so you would pay with a credit card and then it will ask you to put in your phone number.
Max Friedrich:
And then you would, via your phone number, being tied to your credit card, collect loyalty points every time you would use a credit card at that coffee shop. You would get an SMS like, hey, text message, you collected so and so much points. And what to do now, it appears like, because we've seen some screenshots kind of going around on Twitter, is that these loyalty points now go into Cash App. So you would be able to access loyalty points via Cash App, which is a pretty straightforward move. Something that we would expect and then kind of starting to merge these two ecosystems. But I think it's super interesting from a customer acquisition perspective for Cash App, and for the merchants, because if you look at the geographical distribution of Cash App users and Square point of sale users.
Max Friedrich:
You have a concentration of Cash App users in southern states, which probably is because there are a lot of unbanked people in southern states. And we think that these unbanked people, which literally didn't have a bank account before, started to use Cash App as a primary bank account more and more, and then probably also got on boarded to the direct deposit feature where they actually now have a routing and account number. So you have a concentration of Cash App users in the southern states, but the Square merchants, the coffee shops and flower shops and whatnot, they are more saturated on the coasts. So you have kind of this symmetric kind of distribution, Square could pitch a point of sale merchant in the southern states, where you have a high concentration of Cash App users.
Max Friedrich:
Square could say, hey, if you use the Squarepoint of sale equipment, and if you use our loyalty program, there are a lot of Cash App users around here that would probably like to engage with you, and you could build your customer base through Square loyalty that is connected to the Cash App users around you. So Square could basically offer that local merchant marketing platform with Square loyalty, and direct access to advertise through probably thousands or tens of thousands of Cash App users around set Square merchant. In turn, Square can use all the point of sale merchants on the east coast and the west coast where you don't have as much Cash App users because people tend to be a little bit higher educated, and that has been historically been kind of more that Venmo demographic, kind of college educated millennials that go to these coffee shops and around the coasts.
Max Friedrich:
Square can use the coffee shops with this Square loyalty program to acquire Cash App users in those regions where you historically didn't have as many Cash App users, so on the costs, and that's just one example. That is opportunity that they have, and that is very unique. And for us as investors is obviously very interesting. And I don't think that many people are kind of thinking, what could that be in, let's say, five years. And I think it's very unlikely that a challenger bank would be able to build up similar merchant penetration as well to build that kind of network effect.
Will Beeson:
So it sounds like the unbanked and underbanked population is an important demographic for the Cash App. And is, I guess what the dynamic there that it offers an easy enough way for users to kind of send money to each other digitally, and then slowly over time, because I guess, the Cash App in that case, wouldn't be attempting to displace an existing banking relationship. It's just easier to expand their footprint with their customer base?
Max Friedrich:
Yeah, I think that's true. I think there are counties in the U.S. where you have very low bank branch penetration where people have to rely on... Technically it's called alternative finance. But often very overpriced kind of payday lending and other products, and/or prepaid debit cards and so forth. So, a lot of folks potentially didn't even have the ability to store value. And now with the Cash App, they were able to do so and were able to send each other money, and kind of listening to Jack Dorsey's comments, he has actually said that, that's something that sort of Cash App actually didn't really have on the roadmap. So this was actually not something they tried to penetrate the unbanked population of the U.S., but it actually just happened because the product was structured in a way where it basically enabled people to store value and send each other money pretty easily, and so that kind of went from there. And then, Cash App rolled out other products.
Will Beeson:
So if I just kind of think this through in terms of a customer behavior standpoint, presumably those users like they're getting maybe a paper check from their employers, and they're cashing it, and then just living off the cash, using the cash rather than holding it in a bank account and maybe spending with an attached card. So how can that kind of shift digital, and I guess the hurdle would be setting up the direct deposit, because suddenly like that's the shift from the way that I know to this new way, which requires trust in digital, but it probably saves you a ton of money. Because, I think generally the fees for this thing, what you call, alternative personal finance options are quite onerous.
Will Beeson:
I guess the point of honing in on that is because it would seem like we're in the midst of an acceleration in specifically with that demographic, if that is indeed the dynamic with the CARES Act payments that went out recently. And Square with the Cash App was very quick, and they weren't alone to encourage, like to set up direct deposit functionality. Maybe they already had it in place, but to kind of encourage users to use it, basically to get their government stimulus check, in a weeks or months earlier than they would have otherwise. I don't know to what extent you guys have current data. But have you seen that having been impactful on caches user base? Or do you expect it to be?
Max Friedrich:
Yeah, so it's hard to get real time data on that. But we've actually learned a bit from Squares earning released that I think was two weeks ago around that time. Where they reported more than a 2X increase in stored funds. That's actually a metric they put out there. So I think they had over $1 billion in stimulus payments kind of coming in. And they said they did not disclose the number of direct deposit users. But they said that it basically went up between two 2X and 3X, which could be kind of a one time event. But we hope that there actually were these people that you were talking about, that previously were not registered with the IRS.
Max Friedrich:
And now we're kind of by cash and cash are kind of sent out that instant message into the app like, hey, if you want to get the seamless payment faster, we can offer you a guy to sign up with IRS and you can put the Cash App direct deposit numbers in their, routing an account number, and you can actually get your payment on there. And from there on the kind of locked in. I think we also beyond that demographic, which obviously is great, that cashier was able to offer that. But I think that there might be a separate user group that maybe already has a banking relationship that uses Cash App, with the cash card kind of everyday spending that just decided to get their stimulus payment in the cash app so they can spend it with the cash card.
Max Friedrich:
And that would be probably kind of a more upmarket, kind of demographic, because I think it's, very heroic from Cash App be the first kind of primary banking product for a lot of unbanked people. And I think that's awesome that they've done that in recent years. But for me, the bigger opportunity really is going up market and really kind of targeting Generation Z, because from a Big Picture perspective, what Venmo was able to do, in early 2010s is go to the colleges or see fast adoption at colleges around the US. And they've built this huge product that was used throughout the US like 10s of millions of users using Venmo peer to peer payments.
Max Friedrich:
But they kind of missed the boat on building that P2P payments platform into real digital wallet, banking platform, challenger bank, whatever you want to call it. I think at some point they had the shot, and they're still kind of trying I think they now also launched direct deposit. So you can also deposit your stimulus check into Venmo over the recent months, but they kind of missed the boat on really building this P2P payments platform out for the whole millennial generation into banking platform. And I think what Cash App has the opportunity to do now is take advantage of that opportunity with Gen Z with this upcoming generation that is super involved on different social media platforms on Instagram on Twitter, or Cash App has a lot of following.
Max Friedrich:
Who watches twitch? Like I said, e-gaming partnerships and so forth. Cash App partners with like 10s of different podcasts. So while the unbanked demographic is very heroic that they've done that, I think the bigger fish so to say really is try to get as many of the Gen Z people onto this platform. And that obviously, if you move more into the colleges and kind of into states where you see a lower unbanked rate that obviously from an economic perspective should be more interesting as these users should be more generate revenue generative than that the unbanked population that Cash App started out with. And just one last point, it's really hard to figure out if they're actually doing this shift, if they're moving from the southern states, where you see a lot of unbanked population to across the country and we capture Gen Z, Cash App doesn't really give out geographical user data or something.
Max Friedrich:
But one proxy we can use is to look at Google Trends. And what we've seen there is that if you look at the last, let's say, three years, the states we have the highest search interest growth for Cash App have been the [inaudible 00:44:01] states or generally states with a high unbanked rate. But as of late 2019 and early 2020, we've seen other states with a lower on bank rate and because actually like kind of more wealthy population, better educated population, so forth, having more and more interest in to Cash App. And I think for all of the challenger banks, but especially for Cash App, that should be [inaudible 00:44:29]. It's great being a solution for the unbanked population. But I think in order to really succeed, they have to go mainstream.
Will Beeson:
Next, based on your analysis, I think you project the wallet market in the US to be something like $800 billion in 2024. Do you think about how we get from here to there? Is this square cash and Venmo each 10 X and and it's done and that's it or are a bunch of new players going to come to market to drive that market development? How will the dynamic between wallets and and challenger banks as we currently define them play out and contribute to that that market in your view?
Max Friedrich:
Yes. So that number is heavily influenced from kind of investor valuation perspective. So if you look at what investors pay per active challenger bank user in their venture capital funding rounds, they pay between 1000 and $3,000 which is actually quite a lot and that that number is pretty high because, like I say that calculation is done on an active user basis. So a lot of challenger banks will put out user milestones. So for example, China put out 8 million users in February. Those are very likely not active users, but just generally how many users signed up. And just to put it kind of broad context, Cash App had around 16 million downloads last year. That's not an apples to apples basis. But they had 60 million downloads and around 24 million active users so seems to be kind of one third of the overall user base seems to be active users. And that's also a ratio. I also hear from venture capitalists that have invested in those challenger banks. So on active user basis, venture capitalists pay between $1,000 to $3,000.
Max Friedrich:
And if you look at a bank customer, how a bank customer is valued by public market, investors We arrive at around $3,600 in market cap that investors pay per active bank customer each year. And obviously that includes several different products, obviously, say checking and savings, but also credit card other lending products, which are higher margin, mortgage and and those kind of things also go into that. So kind of the full stack of bank products. If you compare that to what a Cash App or Venmo user or value that, this number is a lot lower than what the venture capitalists pay for a private challenger bank user and what public market investors pay for bank customers on a market cap basis. So that number for Cash App is around for Venmo and Cash App is between $100 and $200.
Will Beeson:
So when $200 for Venmo or Cash App versus, what was this something like $2,000-$3,000 for a digital banker and comm bank customer?
Max Friedrich:
Between $2,000 and $3,000 for a challenger bank or digital bank user and between $3,000 and $4,000 for the combined bank. And if you go through the consultancy literature, the general lifetime value of a bank customer reaches between $3,000 and $6,000. So, that's kind of at maturity, what a bank customer is worth. And well, the venture capitalists would try investing in challenger banks, sometimes for as much as $3,000 per user. Their bet basically, is that those challenger banks will add more and more products and their users will generate more and more revenue. And they can probably do this at a little bit more attractive margin basis than the incumbent banks because they don't have All these branches standing around and everything and all this technology and all these thousands of employees and so forth.
Max Friedrich:
But still, the margin there isn't as big between what the venture capitalists actually paying for challenger bank user today versus what incumbent banks users is valued at maturity. Where for us as investors, it becomes interesting is if you look at, like I said, Cash App, and Venmo, which are valued at around $100 to $200. And I think that comes, first of all, because these platforms Cash App and Venmo really started as peer to peer payment platforms. And in the perception of especially institutional public market investors, which often are kind of conservative. And so they still haven't really understood that Cash App is moving from peer to peer payments platform into this digital banking platform with potentially really interesting implications if you think about combining the Square Ecosystem with the Cash App ecosystem.
Max Friedrich:
So to make a long story short, the $800 billion user number really is driven by us expecting that investors will start to value Cash App and Venmo users, but more actually Cash App users, because they're pushing really in the banking platform direction. Accordingly, at some point bank customers are valued at the maturity level today. That of course, requires that Cash App continues to build out the product, and gets more users to use the direct deposit feature, the Cash Card feature the debit card, and all kinds of other consumer lending products. But generally, that's our expectation that I've kind of talked about and at the beginning of our conversation, where we think that these digital worlds is, these mobile applications on users phones are growing into kind of your bank branches in your pocket to this place where you have access to different consumer financial products.
Max Friedrich:
And if people make use of them and actually generate revenue, and the margin structure is more interesting because you don't have all these fixed assets, then the valuation of each of those users really could grow into that valuation where bank customers are valued at maturity today. And that's where it becomes interesting. And that's where this $800 billion number comes from.
Will Beeson:
Excellent. Well, look, there is a much longer conversation to be had around competitive dynamics between a digital challenger banks and and what the future potentially looks like. However, I would suggest that everyone first check out your report, digest it, think about it and perhaps that's subject matter we can pick up on a future conversation. Max look amazing work and fantastic to connect with you. I'm a big fan of the content that you guys at arc put out.
Max Friedrich:
Thank you Will.
Will Beeson:
Max Friedrich and Lex Sokolin, thank you very much for joining us today.
Max Friedrich:
Thank you for having us.
