Square (NYSE:SQ) has always made it clear that it wants its popular Cash App to be able to replace a traditional bank. Its next step toward that goal might be enabling users to buy and sell shares of their favorite stocks in the app. And Square is testing a feature that will allow users to place trades for free, according to a report late last week from Bloomberg.

Square already supports free bitcoin trading in the app. The company brought in $125 million in revenue from selling bitcoin, and generated slightly more than $2 million in gross profit. Expanding to the entire universe of stocks would put Square head-to-head with Robinhood, which was recently valued at $7.6 billion.

Square has several advantages over the competition for winning market share for low-cost brokerage services, and it could be another tool to get users into the Square ecosystem.

A person using Cash App on a smartphone.

Image source: Square.

15 million users and counting

Square's last update on its Cash App user base came in its fourth-quarter earnings call when management announced it reached 15 million active users. That more than doubles the number of users from the end of 2017. It's also considerably bigger than Robinhood, which had 6 million users at the end of 2018.

Importantly, Cash App users are highly engaged in the app. As mentioned above, they bought and sold a lot of bitcoin last quarter. Beyond bitcoin, the company generated another $135 million in revenue from various features including its Cash Card (which generates revenue in the form of interchange fees) and Instant Deposit.

That puts its revenue run rate well ahead of its next-closest competitor, PayPal's (NASDAQ:PYPL) Venmo, despite reporting a much smaller user base. PayPal said Venmo had 40 million users as of the end of the first quarter. Despite that larger user base, Venmo management said its revenue run rate was just $300 million.

That level of engagement indicates Square is doing a much better job of attracting users that can most benefit from its features like the Cash Card. In other words, they keep a balance in their Cash App accounts. Those are users that are most likely to take advantage of free stock trading in Cash App as well.

Imagine if you get your paycheck directly deposited to your Cash App account. You set aside some of that paycheck automatically to invest in your favorite stocks, and the rest you can spend using your Cash Card. Square is already starting to look more like a complete replacement for a bank without all the typical fees.

Engaging users with the entire ecosystem

An important distinction between Square and a competitor like Robinhood is that Square has numerous ways to monetize users beyond brokerage services. As a result, it can provide its trading services at a lower price to the user.

Robinhood charges users $5 per month for a Robinhood Gold membership, which includes the ability to trade on margin (with $1,000 of margin offered interest-free), the ability to deposit up to $50,000 in funds instantly, and access to extended-hours trading. It also provides research reports and plans to offer Level II market data. Robinhood also generates revenue from the interest it charges on margin trades beyond $1,000 on those accounts.

Square may be able to offer similar services at a better price. It could allow users to transfer any balance from their Cash App account to their brokerage account instantly. It could offer users that spend over a certain amount on their Cash Card access to better services on its trading platform. As the company expands the features of Cash App, it'll have more opportunities to monetize users beyond just charging a monthly fee like Robinhood. That's the power of Square's ecosystem.

Not to mention free stock trading is likely going to attract new users to the Cash App, just as free bitcoin trading did a couple years ago. And once those users discover the value of Cash App's other features -- either on their own or through Square incentivizing it -- Square will see a nice jump in Cash App revenue outside of its trading platform.

Free stock trades are a natural next step for Square with Cash App after finding success with bitcoin trading. The growth of Robinhood indicates there's strong demand for such a feature, and Square is well-positioned to get existing users to adopt the feature and get new users by offering better pricing and monetizing their engagement in other features.