PayPal (PYPL 4.69%) just reported its strongest quarter ever as an independent company. Total payment volume accelerated to 29% year over year, as the COVID-19 pandemic pushed more consumers and merchants to e-commerce instead of in-store shopping. Not only that, but PayPal's transaction margin climbed to its highest since the first quarter of 2018 despite substantial growth in Venmo (which drags margin down).
Management expects those trends to continue. It's now seen about four months of how COVID-19 is impacting its business, and what happens when governments allow businesses to resume in-store operations.
But management isn't going to rest on its laurels. It sees a lot of opportunities for its business in the current environment, and it's planning to invest $300 million in three key areas to keep growing.
The biggest area of investment for PayPal will likely be in-store payments, specifically QR codes. The company introduced QR codes in both the PayPal and Venmo apps last quarter, but it still has work ahead to get merchants to integrate QR codes into their point-of-sale systems. To that end, it signed a nationwide partnership with CVS to support checkout with QR codes at its stores.
In-store payments are an important piece of CEO Dan Schulman's aspiration to reach 1 billion accounts using PayPal an average of once per day. During PayPal's second-quarter earnings call, Schulman said QR codes will be key to monetizing Venmo as well. Management's last update on Venmo was a $450 million revenue run rate as it exited 2019, and it says it now has over 60 million users. For reference, that's a much lower monetization rate than Square's (SQ 9.50%) Cash App.
Increasing PayPal's presence for in-store payments could also benefit its main e-commerce operations. A broader, more-engaged user base makes it even more attractive as a payment processing option for merchants.
Beyond in-store payment functionality, management sees an opportunity to add a lot of new features to its digital wallets.
It's already made a significant step toward adding new functionality to Venmo, introducing direct deposits for the app in April. Square has notably called out direct deposit as a strong driver of monetization for Cash App. "Direct deposit customers have generated revenue which is multiples higher compared to customers who only use peer-to-peer," Square CFO Amrita Ahuja said on the company's first-quarter earnings call.
Schulman mentioned ideas like bill pay, subscription management, rewards management, deeper integration with Honey, budgeting tools, and new forms of credit. The company plans to launch a Venmo-branded credit card later this year. Schulman has also detailed the unique capabilities he sees in combining PayPal with Honey's data. Expanding functionality opens up lots of new monetization and engagement potential.
Expanding capabilities in international markets
The market for digital wallets may have even greater potential outside of PayPal's well-established markets like the United States. In fact, international revenue grew from 47% of PayPal's total in the previous four quarters to 50% during the last three months. And PayPal wants to capitalize on that momentum.
"We're seeing explosive growth in Mexico, Japan, Brazil, really frankly across Western Europe," Schulman told investors. "So, we will invest continually in this business." PayPal's also investing heavily in China through its majority ownership of GoPay.
PayPal has already been working on establishing new partnerships in international markets. For example, it signed a deal with South Asian commerce/ride-hailing app Gojek as part of an investment round it helped fund in June. Investors should expect to see PayPal make more investments like this, which give it strategic partnerships with popular companies in international markets as well as stakes in fast-growing companies.
Combined with opportunities to expand the functionality of its digital wallets -- specifically by focusing on contactless in-store transactions -- PayPal sees a lot of places to spend its unexpected profits. That said, Schulman assured investors that if he can't find any appealing investment opportunities for the fintech company, "we'll return that back to shareholders."