PayPal Could Still Have Lots of Growth Ahead

Many investors think of PayPal (PYPL 0.34%) as a mature payments company, but the reality is that it is still growing at an impressive pace.

In this clip, Industry Focus: Financials, host Michael Douglass and Motley Fool contributor Matt Frankel discuss why PayPal could be a smart way to play the "war on cash."

A full transcript follows the video.

This video was recorded on May 16, 2018. 

Michael Douglass: Let's turn to our next stock, which is PayPal. Everyone knows PayPal as, well, PayPal. [Laughs] Sort of like how everybody knows Facebook for Facebook. But, like Facebook, PayPal is also invested in other properties that are not its namesake -- chief among them, of course, Venmo. Which, if you are a millennial or know a millennial, you've probably heard about Venmo and how great it is for basically helping people not have to split the bill at restaurants.

Matt Frankel: Yeah. I personally don't use Venmo, but I'm an older millennial. We'll chalk it up to that. I'm a millennial by about three months. [Laughs] But, the statistics don't lie. Venmo payment volume's up 80% year over year. That's enormous growth. People think PayPal is kind of a mature company, but they're really not. Peer-to-peer payment volume, they're growing at a 50% year-over-year rate, and it's about a quarter of the total right now. So, PayPal is really not just eBay's payment processor anymore, which is where they were years ago. PayPal used to be part of eBay, if people aren't familiar. But, they're really transitioning into a new jack-of-all-trades payment company.

Douglass: Yeah. It's interesting. One of the things that PayPal execs always highlighted about Venmo -- and I had been skeptical about it -- is this idea that the social aspect is really a differentiator. If you use Venmo, basically, you send someone money, and you can give a reason that you're sending money. You can say rent, or brunch, or something completely ridiculous, if you want. And they really highlighted the social aspect of being able to see what other people are paying each other for as being a differentiator. I have been skeptical. But, I will note, John Rainey, PayPal's CFO, at a recent conference noted, and I'm quoting here, "The consumers that are using that are opening the app four and five times a week just to check the social feed." Now, I mean, is it just to check the social feed, or is it because they forgot what they were paying for? I don't know. But, it's certainly interesting to see that there's some data backing up that assertion.

And, I mean, at the end of the day, a lot of people talk about different things like Zelle as potential competitors to Venmo. But the fact of the matter is, even with Zelle's launch, Venmo's growth has continued to accelerate, and they haven't seen any drawback. A big part of that is, Zelle, which underlies a lot of the banking, peer-to-peer payment apps, the average size of transactions is a few hundred bucks, whereas for Venmo, it's more like upper 50s, low 60s, according to PayPal execs -- which is, again, a sign that you're using those apps for two different, complementary, things. So, they can both win in an increasingly mobile-first society.

Frankel: Another good thing about PayPal is, not only is the peer-to-peer side of their business doing really well, but their core business is still growing quite rapidly. They added over 8 million new accounts in the first quarter alone, 15% more accounts than they did this time last year. So, their core payment business is really doing well, and people who are using PayPal are using it more. Per account, the average PayPal customer uses their account almost 35 times a year. That's an increase of about 8% from last year. So, their core payment business is doing really well in addition to their peer-to-peer business. And the core payment business, at least for the moment, is where they're making their money. That's the big revenue driver.

Douglass: Yeah, and that's one of the things that's sort of an opportunity and a danger for PayPal. At some point, they're going to want to try to monetize Venmo. And they've begun thinking about this a little bit with what's called "Pay with Venmo," which is essentially rolling things out so that people can use Venmo to pay merchants directly. So, certainly, there's some opportunity there.

But, execs, I think very appropriately, have been very cautious in their outlook, and said, "Listen, we're not going to try to hit some amazing number on the revenue side with this and tank the whole experience," I think because they recognize that fundamentally, Venmo isn't a terribly sticky product. So, if you make things incrementally more difficult for really anybody in that chain -- from consumer-to-consumer to business -- then there may be a significant push to something else, whereas if you wait and allow that network effect to get stronger and stronger, it's going to become increasingly difficult for people to break away, and that's where there might be some monetization opportunity. But, that's years down the road.

Frankel: One more little thought on the monetization of peer-to-peer payments: Bear in mind how young that industry is. It was only about five years ago, people didn't think Facebook would be able to monetize its business. The point is, this is still in its early stages of evolution. There could be many different avenues they could take it to monetize payments without charging fees or things like that. It's a very, very young industry still.