PayPal (PYPL 0.64%) included an interesting tidbit in its fourth-quarter earnings update. Venmo, its peer-to-peer payments app, ended 2018 with a $200 million revenue run rate.
Monetizing Venmo has been a big challenge for PayPal, especially as Square (SQ -1.57%) has shown excellent progress finding ways to monetize its Cash App. PayPal has largely taken to copying some of the same monetization efforts as Square, including instant withdrawals to bank accounts and developing a prepaid debit card linked to the account. PayPal has also made progress in attracting merchants to its Pay with Venmo feature, which works just like PayPal's core feature.
Here's how Venmo's $200 million revenue run rate breaks down by product, and a look at how that might change in the future.
Image source: Venmo.
Diversifying its sources of revenue
In October, PayPal's management told investors that it processed $1 billion in instant transfers from Venmo in September. At the time, Venmo charged just $0.25 per transfer, regardless of amount. It bumped that up to 1% with a minimum of $0.25 in October.
If PayPal sustained that volume following the increase in price, that suggests around $120 million in annual revenue from instant transfers on Venmo.
Management says the split between instant transfer revenue and the commerce-related features -- Venmo card and Pay with Venmo -- is about 50-50, not 60-40 as its previous disclosure would suggest. Perhaps the rate change stymied the growth of instant transfers, possibly even costing it volume. Regardless, management's commentary suggests the commerce-related features are driving the revenue growth for Venmo.
Check out the latest PayPal earnings call transcript.
Management also said the split between Venmo card and Pay with Venmo is about even with a slight edge to the card. Both products rely on taking a small percentage of each payment made through their respective mechanisms.
So the current revenue breakdown looks something like this:
Data source: Approximations based on PayPal management commentary. Chart by author.
Where the growth will come from
Ultimately, PayPal's management sees much more promise in its core online payments platform than it does in facilitating rapid money transfers or payments with a linked debit card. "I would expect if you were to think about all three of those in order -- [instant transfers] being the largest, the card being the next largest, and then Pay with Venmo being third -- ultimately that would be completely flipped," CFO John Rainey said on the conference call after PayPal's fourth-quarter earnings.
PayPal isn't reinventing the wheel with Venmo. The core monetization strategy will still be facilitating online payments. That means a lot of Venmo's growth will actually come at the cost of PayPal's growth.
That's a sacrifice management is willing to make. Because users are more likely to hold a balance in their Venmo accounts, the cost of processing payments via Venmo is considerably lower than most transactions on PayPal. Venmo also isn't restricted by PayPal's recent agreements with banks and credit card companies.
Focusing on online payments processing also steers Venmo's monetization efforts away from areas where it competes more directly with Square. Square has ambitions of making Cash App a complete banking replacement, which means things like the Cash Card could become more valuable to consumers compared to the Venmo Card.
PayPal doesn't have any plans to expand its Venmo monetization efforts beyond the three products it's currently working to scale. "We've got some heavy lifting to do to continue to grow like we are with these new areas and don't want to be distracted by additional features," Rainey said. That leaves the door open for Square to compete and innovate, but should help PayPal focus on what it's good at.
