Digital payments behemoth PayPal Holdings (PYPL 1.25%) just inked a new partnership that can meaningfully propel the business going forward. Starting this year, Amazon (AMZN -0.88%) customers in the U.S. will be able to use Venmo at checkout. Having recently parted ways with eBay, PayPal is now back to working with a major e-commerce company.
The rise of online shopping certainly goes hand-in-hand with the growth of electronic payments. But for PayPal, which was already doing well (sales and profit increased 132% and 242%, respectively, from 2015 to 2020), this has the potential to be a game-changer.
Read on to find out what this deal means for PayPal.
Venmo is instantly more valuable
Prior to this partnership, Venmo was already a booming personal finance tool with about 75 million active customers as of June 30, 2021. People can use the mobile app to send and receive money, spend and shop, and invest in cryptocurrencies. But now, with the ability to check out at Amazon, from the user's perspective, the value proposition of having a Venmo account just became more obvious.
If you wanted to buy something from Amazon, the only way to pay was with a debit or credit card. Venmo is the first third-party payments service integrated in the checkout experience. This puts PayPal, whose flagship payments network isn't even available on Amazon, in a class of its own that can benefit from the online retailer's tremendous growth.
While the specific details of the partnership aren't known, PayPal's management team admits that a massive merchant like Amazon will have favorable pricing thanks to its scale. But at the end of the day, it's about being a payment option that's in more places. "Ubiquity of acceptance is really important for us," PayPal CFO John Rainey mentioned on the third-quarter earnings call.
If Venmo was a stand-alone business, this new partnership easily just boosted its valuation.
PayPal's quest to monetize Venmo
Venmo generates revenue from its Venmo Debit Card and Credit Card products, merchant fees, and transfer fees, and from its Uber partnership. In the most recent quarter, total payment volume (TPV) on the Venmo platform stood at $60 billion, up 36% year over year. While this was 19% of PayPal's overall TPV, Venmo is forecasted to only account for 3.6% of the company's revenue in 2021. Therefore, there is a big opportunity to monetize the popular consumer app.
But according to Rainey, "Amazon will move the needle more on TPV than on revenue." Again, let's not forget that the overarching goal is to be omnipresent as a payment option. Venmo's huge millennial user base probably already shops a lot on Amazon, too. Bringing the two together seems like a no-brainer move to drive engagement.
While the Amazon partnership might not have a meaningful effect on PayPal from a financial perspective, it does shine light on just how powerful a force the payments enterprise is. Amazon hasn't worked with another payments provider before, so its deal with PayPal is a stamp of approval in regards to the latter's brand name, focus on security, and gigantic user base. What other high-profile tie-ups can CEO Dan Schulman and his team execute in the future?
PayPal was already unstoppable. Partnering with Amazon just proved it.