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This is how PayPal hopes to turn Venmo into the next PayPal

PayPal Holdings Inc. has built itself into a financial juggernaut during the COVID-19 pandemic, and it is now worth more than Walt Disney Co., Netflix Inc. and every US bank except JPMorgan Chase & Co.

About PayPal PYPL,
+ 1.84%
may be larger, it will probably be due to the fact that the own Venmo brand is turning its popularity among younger consumers into actual revenue.

Making Venmo a real money machine for PayPal will depend on its new boss, Darrell Esch, a PayPal veteran who took over the role in March after the company went through leadership over the past four years. PayPal acquired Venmo as part of its $ 800 million acquisition of Braintree in 201


“This is our time and we will really seize the moment,” Esch told MarketWatch this week in an exclusive post-earnings interview.

Once primarily a way for friends to share dinner control without paying fees, PayPal’s Venmo service has increasingly become a tool that lets people pay artists for virtual concerts or tip service workers during the pandemic. These types of payments can lead to more revenue for Venmo, as the service can charge merchants at the other end of the transaction, just as core Paypal does, while continuing to let users send payments for free, and Esch hopes Venmo can expand further into business payments. .

The company has been slowly plodding along with attempts to monetize Venmo over the past three-plus years, but now plans to “bring many features and capabilities to market in a relatively short amount of time,” Esch said. The company is introducing QR code payments and will launch its own credit card and add existing options such as a debit card and an online cash button.

Venmo’s former CEO came from a Braintree background, focusing on digital payment infrastructures for large technology companies such as Uber Technologies Inc. UBER,
+ 0.06%
and Dropbox Inc. DBX,
+ 1.60%.
He recently left for the venture capital world.

Esch, which has been with PayPal long enough to remember when its original peer-to-peer transfer service was simply called email payments, steps into the position when PayPal opens a new chapter in the company’s history. It is just over five years since the company split from eBay Inc. EBAY,
+ 1.02%,
and now eBay is moving to handle payments on its own and moving PayPal to a more minor role in the market.

With the potential for some lost eBay revenue, Venmo represents the next major growth path for PayPal, which just published a record quarter when the COVID-19 crisis drove the growing demand for e-commerce. The company is looking to take advantage of a balloon user base: More than 60 million people used Venmo for a transaction in the 12 months to June, up from 52 million in the 12 months to December.

“The goal is to go beyond being an app for payment between friends,” Esch said, turning Venmo into a “truly ubiquitous digital wallet that lets consumers spend and pay” also on business.

New features

One of the company’s new initiatives is business profiles, an attempt to get sole proprietors and other individuals to accept Venmo as payment and to establish a formal relationship with the service. Corporate accounts are currently in a single invitation phase and companies can use them freely at present, but PayPal eventually plans to charge companies 1.9% of the total plus 10 cents for each transaction made on one of these accounts.

Of course, many individual holders already accept Venmo payments from their personal accounts without paying any fees, but Esch is optimistic that they will switch to business profiles to take advantage of the social aspects of Venmo’s network and new payment options.

“Creating the business profile will be a way to expose the business to a massive and rapidly growing customer base,” said Esch. PayPal has said that Venmo users routinely browse the service even if they are not sending money, just to see who their friends are paying, and Venmo plans to apply special labels to companies that are popular with customers or particularly active in the service.

The business accounts are tied to PayPal’s broader efforts to participate in the payment landscape in the store. The company has long tried to gain a foothold in physical stores, and it now hopes to do so through QR codes that increase interest in contactless payments due to the pandemic. The small retailers that run business profiles will be able to accept QR code payments, and PayPal announced earlier this week that CVS Health Corp. CVS,
would begin accepting PayPal and Venmo QR codes in 8,200 stores by the end of the year in its first such large-chain partnership.

Esch said that his long tenure at PayPal shaped his approach to the effort, as Venmo will be able to utilize the same technology as core PayPal on QR codes.

“We can go faster when we move as a team,” he said.

The QR codes are huge in China, but Bernstein analyst Harshita Rawat recently wrote that she is not in addition to them to gain momentum in developed markets as they did there. “Rather, we expect QR codes to emerge as one of the many ways to pay for small, everyday transactions in certain verticals,” she said in a note to customers.

They may be more popular for the type of payments that consumers usually trust Venmo.

Barclays analyst Ramsey El-Assal sounded more optimistic about PayPal’s efforts, writing that QR codes could be a “game changer” for the company, with the ability to leverage existing relationships with merchants and provide the feature with great marketing support.

Venmo takes more general advantage of PayPal’s existing relationships with more than 26 million merchants, as users can already make e-commerce purchases via a special Venmo checkout button on the trading pages.

Venmo competes with Square Inc.’s SQ,
+ 0.55%
Cash app, among other mobile wallets. While PayPal’s strategy with Venmo means deeper integration of the product into the trading landscape, Square has followed a slightly different strategy when trying to grow the Cash app, including by adding bitcoin and stock trading.

Get credit

Another major focus for Venmo is the brand’s first credit card, which will be released later this year. Even before taking office, Esch Venmo advised on his rollout of the card, given his knowledge of all credit and his experience working with Bank of America cards before joining PayPal. The world of credit cards is crowded, but Esch said Venmo will strive to differentiate its card in part by creating a compelling in-app experience that captures the service’s “community” core.

“It will feel a lot like a Venmo product and not just another credit card,” he said.

The company already has a debit card that allows people to use their Venmo accounts to buy things online and in stores, with the ability to share those purchases on their feeds.

The Holy Grail ‘

Venmo also goes for direct deposits, which Bernstein analyst Lisa Ellis has claimed may be the service’s Holy Grail. The company allowed users to receive their incentive payments in their Venmo accounts via direct deposit, and now the goal is to get people to send their regular paychecks to Venmo in this way.

With peer-to-peer payments, many users who receive money will choose to transfer the money to their bank accounts, sometimes paying a small fee for the ability to do so directly. (Some analysts estimate that this Instant Deposit feature is currently Venmo’s largest source of revenue.) Direct deposit customers are attracted because they would do the opposite, keep their money within Venmo, and then engage in revenue-generating activities when making purchases through the service.

“Wherever you go for your paycheck, it’s your home base, and banks usually own it,” Ellis told MarketWatch in June. She said it is still unknown whether people will find enough value in the Venmo user interface to make that type of shift valuable, but suggested that an incentive could be a user-friendly billing feature that allows users to manage all such recurring payments in one place.

PayPal CEO Dan Schulman made more confident in the company’s revenue call this week that Venmo can win these users. “I would not underestimate how eager Venmo’s customers are to live their financial lives on the platform,” he said.

Schulman called Venmo “a crown jewel” for PayPal and said Venmo benefits from various new habits that have emerged from the pandemic, including live-streamed training courses and online concerts.

The company last revealed a $ 450 million Venmo revenue rate back in January but declined to provide an update on the latest call, only to say that Venmo revenue increased by 60% from a year earlier in the first three weeks of July. The service’s contribution so far is a drop in the bucket for PayPal, which is expected to generate more than $ 21 billion in revenue this year, but Wedbush analyst Moshe Katri said he “would not be surprised” if the business receives $ 1 billion in revenue in a year or two.

“What I find really impressive is the fact that they are adding more and more solutions to the platform … that this will make this really sticky or stickier,” he said. He believes that the company is “mainstreaming” Venmo by providing a wider population group beyond millennials.

The Paypal share has risen 74% so far this year compared to the almost flat performance of the S&P 500 SPX,
+ 0.76%.

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