PayPal (NASDAQ:PYPL) is in talks with Synchrony Financial to issue a Venmo-branded credit card, according to The Wall Street Journal. Venmo wouldn't be the first tech company to use its popular consumer brand to capitalize on the credit card market. Apple (NASDAQ:AAPL) announced the Apple Card last month; Uber launched a co-branded credit card in late 2017.

Venmo, a peer-to-peer payment app, has had some success with its debit card, which is linked to the balance in a user's Venmo account. The debit card, combined with monetized features like Instant Transfer and Pay With Venmo, put the company on a $200 million revenue run rate entering 2019. That's still not enough to overcome its operating expenses, and the PayPal property is expected to take nearly $400 million in operating losses this year, according to an estimate from Nomura analysts.

Can a credit card help Venmo turn a profit?

A phone displaying the Venmo app sitting on a retail clothing display table.

Image source: PayPal

Creating a compelling credit card is tough

It's really hard to compete with some of the big banks' best credit cards. It's pretty easy to get at least 2% cash back on every purchase. That's why Apple's credit card, which only offers 2% on purchases made with Apple Pay, didn't produce very much excitement among analysts or investors.

Uber, however, created a compelling product for many of its users. It gets one of the best cash-back rates on dining purchases, and competitive rates on select travel expenses. It also encourages regular use through statement credits for online video streaming if you spend $5,000 or more per year, and cellphone insurance if you pay your phone bill with the card.

Uber took a close look at what its users were most likely to spend their money on besides the ridesharing app, and it made a product that rewards spending in those areas. Apple had an opportunity to offer things like free Apple Care or iCloud Storage as perks for putting spend on the card, but the company failed to offer anything beyond a very basic card.

Venmo has an opportunity to create an excellent financial product. It has a lot of access to how its users spend money, based on the data it collects when users pay their friends. Users are required to leave a note, and while it's often used for inside jokes, it's usually pretty clear what the payment is for. Venmo also knows exactly how consumers are spending money on the Venmo Card. It could use that data to craft a rewards card that fits with how its users spend.

If Venmo wants to convince a large percentage of its 23 million active users to sign up for a new credit card, it needs to offer value its users can't get elsewhere. It needs to follow Uber and avoid offering another Apple Card.

A divergent path to monetization

A Venmo credit card doesn't seem very dissimilar from the Venmo debit card, but the two products would actually be quite different. The debit card appeals to the underbanked population -- consumers who don't qualify for a traditional bank account. A Venmo credit card will only be available to consumers whom banks want to do business with.

Last year, PayPal CEO Dan Schulman said he thinks Venmo could offer more services to the underbanked at prices well below what they're used to paying for financial services. Things like cashing a check or paying a utility bill shouldn't require you to stand in line or pay high fees.

A rival peer-to-peer payments app, Cash App from Square (NYSE:SQ), has also taken to offering financial services for the underbanked. And with Cash App's integration with Square's payment terminals and its food delivery platform, a larger percentage of its user base may already be using it to replace financial services. Cash App's integration with other Square services also means it may be able to offer better pricing for those services than Venmo.

Venmo may have greater success by reviewing how its users spend money already, and figuring out the best way to reward them for doing that spending with its credit card. If it strikes a chord, it could be a big moneymaker for the payments app.

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