PayPal Holdings Inc. is finally taking steps to convert its popular Venmo mobile payment service from a loss leader into a revenue driver.
The company recently announced plans to roll out Venmo as a payment option for millions of merchants, following smaller scale tests conducted earlier this year. Up until now, PayPal has focused on growing Venmo's user base, but has done little to generate revenue from the platform.
PayPal already has a robust payments offering and is a popular choice for mobile payment users, so it remains to be seen how meaningful Venmo’s contributions will be. Today Venmo is a small part of PayPal’s business, but has the potential to bring new users into the ecosystem and become a revenue generator.
Popularity on the rise
Venmo has been promoted as an important part of PayPal's business since acquiring the platform through its $800 million purchase of Braintree Payment Solutions LLC in December 2013. Venmo has historically operated as a peer-to-peer payment platform allowing individuals to send small amounts to friends or family. It also incorporates a social element with the ability to add personal notes and emojis to payments. Users fund their Venmo accounts through a connected bank account, debit card, or credit card.
Free and frictionless payments coupled with a unique social element have helped Venmo grow transaction volumes at a 157.6% compound annual growth rate over the past three years. In the second quarter of 2017, the platform processed $8.0 billion in payments, up from $468 million in the second quarter of 2014.
Despite this tremendous growth, Venmo is still a small part of PayPal’s overall business, the core of which is traditional payment processing services. PayPal processed $106.44 billion in total payments during the second quarter of 2017, generating $2.75 billion in transaction revenues.
While PayPal does not break out specific profitability metrics for Venmo, the platform has not been considered a revenue source in the past. Users pay a 3% fee if they choose to fund their Venmo account with a credit card, which mainly offsets credit card fees. More recently, Venmo introduced an instant cash-out option that charges users 25 cents to instantly transfer cash to a bank account instead of waiting the standard one business day.
PayPal has built a strong digital ecosystem that is popular among mobile payment users. According to the S&P Global Market Intelligence 2017 mobile payments survey, which was completed in the first quarter of the year, PayPal was the most popular app for peer-to-peer payments. The survey asked respondents about their recent mobile payment app usage and spending. Venmo trailed Alphabet Inc.'s Google Wallet, which was second most popular overall for P2P transactions, for sending money, but was a more popular option for receiving money.
P2P payments represent a tried and true way to acquire new customers, but generally act as a loss leader for payment platforms. PayPal's core revenue-generating business is processing merchant transactions. This is where PayPal’s online and in-store payment options are most important. Merchants are charged 2.9% of the total price, plus 30 cents per transaction.
PayPal was the most popular merchant-agnostic payment option for in-store transactions among our survey respondents, beating out integrated wallets Apple Pay and Android Pay. This excludes branded apps such as Starbucks Corp.'s mobile app and Wal-Mart Stores Inc.'s Walmart Pay, which were less popular than merchant-agnostic apps in general. PayPal users primarily spent between $21 and $50 on in-store purchases, according to the survey.
PayPal was also a standout for online or in-app purchases, with 34.5% of respondents indicating they had used the service in the previous 30 days. Amazon.com Inc.'s one-click ordering was the most popular option, but also has the advantage of being integrated into one of the world’s largest online retailers. PayPal’s rollout of One Touch is considered a big success for the company, and the strategy for Venmo is likely to follow the same path, making it seamless and easy to pay merchants.PayPal One Touch users tend to spend between $21 and $50 per transaction, according to our survey results. PayPal's $99.33 billion in first-quarter transaction volume across 1.73 billion transactions indicates an average purchase amount of about $57, suggesting that the 24.8% of in-store mobile payment users and 17.7% of online or in-app users that reported spending more than $50 per transaction are likely purchasing bigger ticket items through the platform.
Venmo has been a hit in terms of usage. While it has yet to contribute meaningfully to PayPal's revenue, merchant acceptance represents a chance to capitalize on the ubiquity of the platform. The company is rolling out Venmo payments to merchants that currently accept PayPal payments, indicating that Venmo users are likely not currently using other PayPal services.
PayPal will need to not only convince current Venmo users to pay with their app, but also significantly scale Venmo transaction volumes in order to contribute meaningfully to revenues. The advantage is that Venmo users are likely to be new users of PayPal’s merchant payment services and any growth in transaction volumes will be accretive to growth instead of cannibalizing other PayPal products.
Past success in adapting to emerging trends in payments signals that the company knows how to grow new product lines, and Venmo will likely be no different.