PayPal (NASDAQ:PYPL) just informed users of its peer-to-peer payments app Venmo that a new fee structure will go into effect July 20. Under the app's new terms, individuals (not just registered business accounts) will be allowed to sell goods and services on Venmo for an extra charge comparable to a credit card processing fee: 1.9% plus $0.10 per transaction, the same charge a registered business would pay on the platform.
The company's reasoning for adding this feature is to allow more people to sell goods and services on Venmo with the benefits of payment protection. More importantly, monetizing Venmo's massive user base signals that the app may finally become a moneymaker for the company in the near future.
What Venmo means to PayPal
As of PayPal's first-quarter 2021 earnings report, Venmo's quarterly total payment volume (TPV) was $51.4 billion (a 63% year-over-year increase). Compare that with PayPal's overall quarterly TPV of $285.4 billion (a 46% year-over-year increase on a foreign currency-neutral basis). While Venmo's TPV only makes up 18% of PayPal's TPV, activity on the app is growing notably faster than the overall company.
The last time the company reported Venmo's active user count was in its fourth quarter 2020 earnings report, at which time the app had just under 70 million active users. PayPal currently has 392 million active users overall (including its other brands like Honey, a coupon code browser extension). Similar to its payment volume, Venmo's active users (as of Q4 2020) make up approximately 18% of the company's overall active users, although this percentage is likely even higher now.
But if Venmo hits its $900 million revenue target for 2021, it will only account for about 3.5% of PayPal's top line. At first glance, 18% of the company's users and payment volume contributing just 3.5% of revenue doesn't seem like much. However, the company's targets for 2021 are only "scratching the surface of what Venmo can be," according to PayPal CEO Dan Schulman. Venmo is likely to continue outpacing PayPal's overall growth, fueled by popular offerings like the Venmo Credit Card, cryptocurrency trading, and Venmo for Business.
What more fees will mean for Venmo
Any time a company increases its pricing or adds a premium offering, it risks losing customers to competitors that offer a cheaper alternative. In Venmo's case, this risk seems to be low -- Cash App, Square's payments app and Venmo's biggest rival in the space, charges a higher fee for business transactions and actually doesn't allow individuals to sell goods and services like Venmo soon will.
This makes it far less convenient for people like hairdressers or individuals selling a personal item to use Cash App for their payments. For this reason, Venmo's fees are less likely to meet much resistance among its users.
Venmo is also supported by a massive user base (70 million active users as I mentioned above) that allows it to leverage more powerful network effects compared to Cash App's user base (36 million as reported at the end of last year). Network effects are especially important in the peer-to-peer payments space -- just take a moment to recall how many times you may have been asked "Can I Venmo you?" by a friend or family member.
This dynamic helps Venmo continue to grow its user base and then retain it while adding higher-value offerings to the platform to increase revenue per customer. People come for the free peer-to-peer payments, but they end up staying for the growing suite of offerings available on the Venmo platform.
PayPal can afford to be patient
Venmo will not reach profitability overnight, but the company is prioritizing playing the long game over short-term returns. PayPal is in good financial health, making a habit of overperforming in recent earnings reports on both the top and bottom lines. While Venmo's financials are not reported separately, it's clear the app isn't slowing down the company's overall financial performance while management prioritizes attracting a huge user base with mostly free offerings.
It's very unlikely that the recently announced fees on goods and services sales by individuals will end up contributing to profitability in a meaningful way for Venmo this year. But the existing Venmo for Business fee structure will have a bigger impact -- small businesses are facilitating more payment volume than individuals in most cases. The app is just beginning its path to being a real moneymaker for PayPal, and considering its rapid growth and massive user base, Venmo's path will be one to watch.
In the company's upcoming July 28 second-quarter earnings report, look for more detailed information specific to Venmo's performance. Keep an eye out for continued growth in TPV and active users outpacing overall company growth; figures related to customer adoption of Venmo's recent offerings like cryptocurrency trading, Venmo for Business, and the Venmo Credit Card; and Venmo's progress toward its $900 million revenue target. If the company maintains the momentum from its last report, there is little stopping this fintech leader's stock on its return to all-time highs and beyond.