People are sending billions of dollars to each other via mobile apps Venmo and Square Cash. Last quarter, PayPal (NASDAQ:PYPL) reported that Venmo payment volume reached $3.2 billion, up 154% year over year. Square (NYSE:SQ) doesn't give out exact figures on Square Cash, but it's seen "really, really strong growth," according to CEO Jack Dorsey.
The only problem is that both products are a drain on profits for their respective parent companies. Neither has figured out how to capitalize on the huge growth in peer-to-peer mobile payments as PayPal did last decade by partnering with eBay, which eventually acquired it. Both are working on similar efforts to improve monetization, but there's no timeline for when investors might expect them to payoff.
Neither Venmo nor Square Cash charges users to send money to their friends if they're using a debit card or link their bank account information. They charge a percentage fee to process credit cards roughly in line with the amount they have to pay to process credit instead of debit. As such, they're losing money on each transaction users make since there are other costs involved with processing money transfers and fixed costs involved with running the business.
But both apps have built up active user bases and now store lots of payment information. The next step to take is to leverage that user base to attract merchants to the platform, offering them an easy way to receive payments -- for a fee.
Square unveiled Square Cash for Business about a year ago to allow small business owners like independent tutors accept payment via its app. Consumers don't pay any fee, even when paying with credit card, but Square takes 2.75% off the top before it deposits the funds in the business owner's bank account. That's the same fee Square charges for its more robust card reader though, so it's not clear what the incentive to use Square Cash is for businesses.
Venmo, meanwhile, recently launched Pay with Venmo, which allows apps to accept payment via Venmo instead of forcing users to type in their payment information at checkout. The service is currently available to 550,000 users in a pilot program, but PayPal plans to expand it to everyone in the second half of the year. Management says early results have shown strong validation of customer demand, but Venmo has stiff competition for in-app payments in the form of Apple Pay and Android Pay, among other mobile wallets.
When do they become real businesses?
In PayPal's first go-around as an independent publicly traded company, it was already profitable in 2002. It generated around $50 million in revenue per quarter in the first half of that year, with total payment volume around half of what Venmo currently processes. Moreover, it generated net income of $1.75 million on a GAAP basis during the first half of 2002, before eBay agreed to acquire the company.
Net profit per quarter of $1 million from a service like Venmo won't mean much to PayPal these days, though. The company reported net income of $365 million last quarter. For Square, however, a profitable peer-to-peer payments app could change the entire company. It only expects to produce positive EBITDA starting this year.
With so much money moving through the apps, there's huge potential for either Square Cash or Venmo to become the next PayPal, but they have to start earning more revenue. Square says it has "a lot of designs around" how Square Cash can benefit its business, but provides no specifics.PayPal has the benefit of owning the largest peer-to-peer payments service in the world, and making it extremely profitable.
Both apps are in enviable positions with their relatively large user bases and strong payment volumes. Turning those assets into revenue and profits, however, remains a challenge without a clear answer.
Adam Levy owns shares of Apple. The Motley Fool owns shares of and recommends Apple, eBay, and PayPal Holdings. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.