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People Don't Have Time for Next-Day Bank Transfers, and PayPal Knew It All Along

By Jared McKiernan - Nov 8, 2019 at 11:56AM

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Patience is a virtue, except on Venmo.

It's usually a sound reflection of a company's health when its brand becomes a verb.

"Google it."

"Let's Uber there."

"Slack me." Or "Xerox me," depending on your level of tech savviness.

Many top companies break the bank rolling out multi-level marketing plans in hopes of becoming such a household name -- one so familiar, so essential, that it literally becomes a part of the language.

It might seem a bit premature to assign this elite status to Venmo, the wildly popular peer-to-peer money-transfer app. It might even seem unwarranted, given that Venmo has yet to contribute a profitable year for parent company PayPal ( PYPL -1.72% ).

But don't be alarmed: The fact that Venmo's name recognition is thus far greater than its fledgling financials isn't necessarily a bad thing. In fact, it's likely only a matter of time before its earnings catch up to its pervasive branding.

money falling from the sky

Image Source: Getty Images.

"But I want it now"

Remember awkward conversations about money? Venmo has made them obsolete, which is why it continues to be an incredibly powerful platform for engaging consumers. Whether roommates are squaring up on rent or utility bills or coworkers are reimbursing each other for lunch, Venmo has made it possible via sleek in-app requests with appropriate emojis.

Its total payment volume (TPV) reached $27.5 billion in the most recent quarter, up 64% year over year. That's almost $300 million in payments per day, for an annual run rate that now exceeds $100 billion. And PayPal has announced a Venmo credit card, issued by Synchrony Financial, slated to debut in 2020.

Nevertheless, the fastest path to monetization for Venmo has come in a way few predicted: via its "instant transfer" feature, which sends money from Venmo purgatory right into users' bank accounts in seconds. Venmo charges 1% per transaction for this; it's one of the four ways the company currently makes money. These fees accounted for about half of the company's $200 million in revenue last year — all because users don't want to wait 24 to 72 hours for a free bank transfer. 

The popularity of these transfers may be part of a larger trend toward instant gratification.

A recent study commissioned by stationery supply company BIC suggests that as technology becomes ever more capable of providing everything from knowledge to our money right now, consumers are becoming more impatient and harder to please. (When was the last time you yelled at your phone when the screen froze? Be honest.)

The more technology advances, the more it elevates our already lofty expectations. Why, then, when we can't wait eight seconds for our favorite TV show to load without threatening to cancel our Netflix subscription, would we twiddle our thumbs for up to three days as our money glacially makes its way into our bank accounts?

What the move really shows is that PayPal management is listening to its customers and working to address their impatience. Unsurprisingly, this is already paying off -- and while PayPal is not the first company to try this approach, it's looking more and more like the most successful.

"Squaring up" for the war on cash

There's a lot more to PayPal than Venmo, but in a way, Venmo is very much a microcosm of PayPal: Its user base is exploding, its revenue is consistently climbing (albeit at a decelerating rate over the past year), and, yes, its brand recognition is as rock-solid as ever.

While PayPal routinely draws comparisons to payment processing juggernauts Visa ( V -0.99% ) and Mastercard ( MA 0.60% ), I think a more fitting side-by-side comparison would actually be with Square ( SQ -5.64% ), whose Cash App is shaping up to be a more than worthy adversary to Venmo.

A 2018 Pew Research Center survey found that 29% of U.S. adults make no physical currency purchases in a typical week. PayPal and Square are perhaps the two companies best positioned to cash in on what's being called "the war on cash."

It's entirely possible there's no "winner take all" here, but as of now PayPal is the markedly better investment thanks to a superior net cash position in tandem with some key valuation metrics. 




Trailing-12-Month P/E Ratio



PEG Ratio



Data source: Zacks.

Based on earnings, PayPal's stock is a much better bargain than Square's. That's not surprising when you take into account Square's higher growth rate, but even if you factor that in (see the PEG ratio above), PayPal is still top dog.

In an increasingly smartphone-driven world, expect Venmo to make even more money for PayPal in the fourth quarter of fiscal 2019 and beyond. Investors, meanwhile, can add PayPal to their portfolios and confidently cash in on a culture of impatience and instant gratification.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

PayPal Holdings, Inc. Stock Quote
PayPal Holdings, Inc.
$183.93 (-1.72%) $-3.22
Alphabet Inc. Stock Quote
Alphabet Inc.
$2,840.03 (-0.68%) $-19.29
Netflix, Inc. Stock Quote
Netflix, Inc.
$602.13 (-2.33%) $-14.34
Mastercard Incorporated Stock Quote
Mastercard Incorporated
$322.11 (0.60%) $1.91
Visa Inc. Stock Quote
Visa Inc.
$196.32 (-0.99%) $-1.97
Xerox Corporation Stock Quote
Xerox Corporation
Alphabet Inc. Stock Quote
Alphabet Inc.
$2,850.41 (-0.87%) $-25.12
Uber Technologies, Inc. Stock Quote
Uber Technologies, Inc.
$35.85 (-5.96%) $-2.27
Square, Inc. Stock Quote
Square, Inc.
$181.31 (-5.64%) $-10.84

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

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