Please ensure Javascript is enabled for purposes of website accessibility

How PayPal Is Finally Going to Monetize Venmo

By Matthew Cochrane – May 24, 2017 at 9:41AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The payments platform company is ready to begin making money off its hugely popular peer-to-peer app. Here's how it plans to do it.

PayPal Holdings Inc. (PYPL -0.79%) investors have had plenty to cheer in 2017. Since the beginning of the year, shares of the payment company have appreciated about 25%. In the first quarter, the company added 6 million new active accounts, bringing the total number of active accounts up to 203 million. Those active accounts processed 1.7 billion transactions in the quarter, a 23% increase year over year. This growth in accounts and account activity is showing up on the company's top and bottom lines, too. Revenue grew to $2.975 billion and non-GAAP earnings per share rose to $0.44, both representing high-teen percentage year-over-year increases.

Venmo, PayPal's social payments platform that's popular with millennials, processed more than $6.8 billion in total payment volume, an approximate 114% increase year over year. Even more exciting, the company finally announced it would begin rolling out Pay with Venmo, the app that allows users to make purchases through the platform. While Venmo is heavily used for peer-to-peer payments, PayPal makes little money on these types of transactions. Having the platform used by consumers to make mobile or point-of-sale purchases, however, means PayPal might finally begin to see revenue and earnings growth driven by Venmo.

During the first-quarter conference call, CEO Dan Schulman said:

Today, we are announcing the opening of our beta for select U.S. PayPal merchants to accept Venmo as a mobile payment option. We anticipate the ability to pay with Venmo will be widely deployed across millions of our U.S. PayPal merchant base by the end of this year. The investments we've made in our platform architecture now allow us to enable Venmo as a payment method for our PayPal merchants without any additional integration work on their end, mirroring the approach we used to successfully roll out One Touch.

Hand holding a smartphone open to the Venmo app.

Image source: PayPal Holdings Inc.

The big rollout

PayPal's management has referenced One Touch numerous times while talking about Pay with Venmo's debut. As PayPal's leadership has made known several times, One Touch was PayPal's most successful launch ever. By the end of the first quarter, more than 53 million consumers and over 5 million merchants had opted into the program, which lets people stay logged in and thus check out and pay without resigning in.

One of the factors that Schulman and others in PayPal leadership believe significantly contributed to this successful launch is that it requires no effort on the part of merchants to accept the new platform.

This means that PayPal won't have to approach individual retailers about incorporating Venmo into their checkout processes. Because PayPal is able to build Pay with Venmo on top of its core infrastructure, merchants who currently accept PayPal will be able to automatically accept Venmo as well.

Venmo's payday

PayPal has always taken a measured and disciplined approach to monetizing Venmo. Management doesn't want to ruin the user experience that has given it a cult-like following on college campuses across the country. As CFO John Rainey said on the conference call regarding Pay with Venmo's expansion plans, "It's too precious to get wrong, and we want to get the experience just right."

Smartphone showing a consumer navigating the Venmo app.

Image source: PayPal Holdings Inc.

Yet the day for monetization seems to finally be here. While the company is guiding for Pay with Venmo to have little, if any, impact on the first half of the year, that should begin to change during the second half of 2017 and investors should certainly see the needle move from Venmo in 2018 and beyond, the company has said, though it has given no specific numbers. While there might be some overlap between PayPal's core platform users and Venmo users, this move seems specifically targeted toward those millennials who heavily rely upon Venmo for their monetary needs. Given such, Pay with Venmo is not just going to cannibalize transaction revenues from those who regularly use PayPal at the point-of-sale. 

Even better, management is actively looking for ways to monetize the Venmo experience beyond having the platform used for retail transactions, of which PayPal gets a cut. Earlier this year, while speaking at the Morgan Stanley 2017 Technology, Media, and Telecom Conference, PayPal COO Bill Ready admitted that some merchants like Papa John's had already approached PayPal about advertising on Venmo. Given its potent combination of social media-like characteristics and payments, this could potentially be a real source of revenue for Venmo in the years ahead.

Ready concluded his remarks on Venmo by saying, "We feel like we really, really are starting to get a bead on how do we bring that social engagement into a consumer-to-merchant purchase." Those are words that should warm the heart of every PayPal investor. 

Matthew Cochrane owns shares of PayPal Holdings. The Motley Fool owns shares of and recommends PayPal Holdings. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

PayPal Holdings, Inc. Stock Quote
PayPal Holdings, Inc.
PYPL
$86.97 (-0.79%) $0.69

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
329%
 
S&P 500 Returns
106%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/24/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.