Venmo, the peer-to-peer payments app owned by PayPal (PYPL -2.24%), has been playing copy-cat to Square's (SQ -2.21%) Cash app for some time. It has mimicked key monetization strategies from Square over the last couple years, including instant deposits and a prepaid debit card. Those two features account for about three-quarters of Venmo's $400 million annual revenue run rate.
Venmo's newest feature, Venmo Rewards, is a copy of Square's Cash Boost. Boost offers Cash Card users an instant rebate on purchases made at select merchants. Venmo will offer similar rebates for purchases made with its Venmo Card at its partner stores. The program should increase adoption and engagement with the Venmo Card just as Square saw growth in Cash Card.
Getting to the top of the wallet
Every time a Venmo user swipes their Venmo Card in a store, PayPal gets a small percentage of revenue. Those interchange fees can add up quickly, and management said Venmo Card accounted for about one-quarter of its revenue in Q4 last year.
Venmo has a lot more users than Cash App, but less engagement with its monetized products like Cash Card. In order to grow, Venmo needs to give users a reason to keep the Venmo Card in their wallets.
Boost has been instrumental in growing Cash Card. In its second-quarter letter to shareholders, Square said Boost "has increased Cash Card adoption and driven Cash Card usage." Management also noted the most popular places to spend using Cash Card aren't places with Boosts attached; they're big retailers like Walmart and popular restaurants like McDonald's.
There's no reason Venmo users won't behave in a similar fashion to Cash App users. Rewards should provide a solid boost to the interchange fees Venmo collects, but the growth will come at a price.
If PayPal accounts for Venmo Rewards in the same manner as Square, the rebate will act as contra-revenue. So if a Venmo Card user uses their card at Target -- Venmo collects between 1% and 2% in interchange fees but pays out 5% in Rewards -- Venmo actually books negative revenue on the purchase. That could provide a headwind to Venmo's revenue growth, but its revenue doubled between the fourth quarter of 2018 and the third quarter this year.
All about shopper data
One of the big upshots of increasing adoption of the Venmo Card is getting a better sense of where Venmo users are spending their money. Venmo already collects data on its users for peer-to-peer payments, asking what each payment is for, and Venmo Card allows it to expand to purchases made with businesses. That may become even more powerful when combined with the data PayPal collects from its much larger PayPal business.
Square has successfully shifted Boost from a contra-revenue product to a revenue-neutral or perhaps revenue-generating product. It showed merchants it's able to "drive incremental revenue for merchants via customer acquisition, more frequent visits, and higher ticket sizes," and now more merchants are sponsoring their own Boosts.
PayPal could leverage similar data from Venmo Card purchases to encourage merchants within the Venmo or PayPal network to run their own promotions. That would enable PayPal to grow its monetizable transactions without additional costs. And with over 23 million merchant accounts on PayPal, that's a big opportunity.
Ultimately, PayPal expects to monetize Venmo the same way it monetized its flagship product: via processing transactions with merchants. Increasing engagement with the Venmo Card and collecting more data on how users spend money should help it bring new features to its users and merchants to encourage more monetized transactions.