PayPal: Why Venmo's Monetization Will Be A Success

| About: PayPal Holdings, (PYPL)


The global mobile payment landscape is rapidly evolving.

Venmo is viral by design to effectively leverage this changing landscape.

We believe that Venmo could become PayPal's most valuable and lucrative asset moving forward.

Venmo's Monetization Begins

One of the key takeaways from PayPal's (NASDAQ:PYPL) earnings call on January 29th is its initiative to "begin trials allowing Venmo customers to pay with Venmo at selected PayPal merchants."

This was a well-timed decision as Venmo has been well received by consumers. This can be seen from Venmo's high growth rate as of Q3 2015. For instance, in the last 12 months alone, the volume processed by Venmo increased by 200% y/y from $700 million in Q3 2014 to $2.1 billion in Q3 2015.

Making Venmo "one of the fastest growing apps in the world and likely one of the top 10 apps in the U.S. by volume," according to PayPal Holdings, Inc.'s CEO Dan Schulman during the company's Q3 2015 earnings conference call.

We believe that the monetization of Venmo will be a huge success. In addition, monetizing Venmo will add more value to Venmo users as the portfolio of usage for Venmo will expand, and it will also allow PayPal to begin monetizing what we think could be its most valuable asset in the future.

Why Value Is Hidden

Venmo's potential has not been observed because:

  • Venmo has never fully operated as an independent entity

It is always difficult to value all businesses in diversified companies. As a result, the market ends up discounting conglomerate stocks. This is why PayPal's spin-off from eBay (NASDAQ:EBAY) was a great idea.

But in spite of the spin-off, Venmo has always been a small segment of other businesses. This has made it hard for the market to see its value.

For instance, in 2009, the co-founders Iqram magdon-Ismail and Andrew Kortina released a beta version of Venmo and the app only became publicly available in 2012. But within 5 months, Braintree purchased Venmo for $26.2 million. At the time of the purchase, Venmo was said to have been growing at 30% per month. Also, it claimed that Venmo was handling 10 million payments per month and was expected to process $250 million by the end of 2012.

However, in 2013, Braintree decided to cash out for $800 million sale to then eBay Inc.'s PayPal. At the time of the purchase, Braintree was seeing $12 billion in payments annually with over $4 billion of those payments on mobile.

Furthermore, another reason why Venmo's valuation has been hidden is because the company has never been effectively monetized - until now. We believe that starting this year, that is going to change. And it is going to change for the better.

  • Market-oriented approach placed it in a sea of unicorns

Venmo's business approach is different because it is focused on attracting consumers first before going to businesses.

This idea works because businesses go where people are, but people do not always go where businesses are. Venmo focused on basic human interactions - the easiest way to pay your friends. Anyone who has had the frustration of figuring out how to split a bill or borrow or lend money to a friend far or near appreciates the significance of Venmo the very first time you learn of it.

Ideally Venmo's 200% y/y growth rate with the backing of PayPal would make it one of the most favorite and most valuable apps, but recently unicorns have earned themselves a bad name. And Venmo is not an exception.

Catalysts To Venmo's Success

We have to acknowledge that the mobile landscape is changing and it is tilting towards mobile payments. It is well known that consumers are shifting to mobile usage. Mobile digital media time is significantly higher compared to any connected device.

But this changing landscape favors Venmo for numerous reasons:

  • Surge in Cyber Attacks & The Cycle of Trust Advantage

The increase in cyber attacks has been a problem for many firms, but a great opportunity for cyber security firms.

But there is another seemingly benign yet critical aspect of cyber security we have not yet considered - trust. The rise of cyber security cases create mistrust for technology. This mistrust is detrimental for start-ups especially those that handle people's bank account details.

This mistrust creates resistance to adopt new technology. This is what separates Venmo. It is an app of friends of friends. You can choose to highlight transactions with friends and others can see them on their news feed. This creates an instant level of trust that other apps will not be able to match. This is more than just a cycle of friends, it is a cycle of trust.

This cycle of trust is an invaluable asset that Venmo has and that many copycats will have a hard time imitating.

  • Leveraging Social Connections - Viral by Core Design

Venmo's competitors such as Square focus on convincing businesses that its product is the best and expect consumers to simply adapt to the change. Venmo's approach is different. It tries to convince consumers that it has a great, user friendly and trustworthy product, and expects businesses to follow consumers.

We think Venmo's approach is the future of mobile payments. Businesses are more likely to follow consumers and not vice versa. Think about concepts that were based on this mantra. Founders thought about the best way to add value to consumers and once they effectively added value to consumers and consumers kept using their product, they could then monetize their ideas. Facebook's (NASDAQ:FB) initial value proposition was to connect friends and families, Google (NASDAQ:GOOG) (NASDAQ:GOOGL) wanted to democratize information and eBay wanted to even the playing field between big and small businesses. All these ideas where value based. Venmo offers that. It makes payments between friends and colleagues easier, intuitive and faster.

We think this is one of the attributes that will make Venmo's monetization efforts very successful.


The global mobile payment landscape is evolving rapidly. There is mass adoption of mobile devices and the digitization of money. According to Statista, the global mobile payment volume is expected to grow by 140% from $450 billion in 2015 to $1.08 trillion by 2019. Venmo's market is undoubtedly lucrative. There are many factors that will make Venmo's monetization a success:

  • Everyone loves free things especially if they add value. There are no charges, except for credit cards, for using Venmo. Plus it's a friends of friends app. People are likely to trust what their friends trust, making customer acquisition and customer retention much easier and cost-effective.
  • We think the growth potential for Venmo is huge. The company is only in the United States. Meaning that PayPal needs to accelerate its growth and reach more lucrative markets like China, Russia, Germany, Japan etc. It needs to be able to allow transactions outside the United States. Venmo's global growth is going to be made easier by the rapid emergence of cheap but technologically advanced smartphones from companies like Xiaomi and Huawei.
  • More so, there is a potential for Venmo to be used to enhance a person's credit score moving forward. There is a trust feature for recurring payments e.g. auto-pay for people sharing rent. Though farfetched, this could become an alternative to improving people's credit score for those without credit.
  • But you also have to realize, Venmo could become one of PayPal's most valuable and lucrative asset, but it can also become one of the greatest spin-off stories in mobile payment in years to come.

Venmo is viral by design. Its core competence is its ability to harness and apply the same social media connections that have made Facebook, Instagram and WhatsApp viral, but in mobile payments. We think, if implemented correctly and not completely integrated with PayPal, Venmo's monetization is a start of something great.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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