When PayPal Holdings Inc (NASDAQ: PYPL) reported its 2016 fourth-quarter earnings there was a lot for investors to like. Revenue and earnings were both up by double-digit percentages, but, more importantly, other business fundamental metrics continued their consistently positive trends: Total active accounts increased 10% to 197 million. Payment transactions per active account are now a shade over 31, a 13% year over year increase.
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What might have been most impressive was the continued explosive growth of the P2P payment app, Venmo. For the quarter, Venmo processed $5.6 billion in payment volume, an incredible 126% increase year over year. In December 2016, Venmo crossed the $2 billion total payment volume threshold in a single month for the first time. It was only earlier in 2016 when it crossed the $1 billion threshold in a single month for the first time.
Image source: PayPal Holdings Inc
More than just incredible growth, the app continues to earn recognition and praise in the press for its innovative nature. Time magazine named Venmo one of the best apps for 2016. Fortune magazine named it one of its breakthrough brands for 2017.
It is no secret millennials are driving Venmo's growth. Campus culture is littered with examples of Venmo's popularity where the app's nomenclature is increasingly being used as a verb as in, "I'll venmo you the money when I get back to my dorm." Student-written opinion pieces praise the service. College newspapers run feature articles on how the app is revolutionizing the way money is being spent on campus. Signs sporting Venmo user IDs have even been spotted on ESPN's popular College GameDay show asking viewers for beer money donations.
Venmo's unique user experience
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So what makes Venmo so cool? PayPal CEO Dan Schulman believes it's the app's social media-like quality where users can leave a public comment or emoji after every transaction that makes it so appealing to millennials. At last month's Goldman Sachs Technology and Internet Conference he said:
And what Venmo has done and the thing that makes Venmo unique is it's not a payment transaction, it's kind of an experience. And what I mean by that is 90%-plus of all Venmo transactions are open to somebody's friend, network, and 90%-plus have a some sort of emoji or written commentary on that transaction. So if I want to see what you're doing, who you're dating, what you did, I can just go into your Venmo feed and see it. And there is like -- and everybody shares. So it is not a payment transaction but an experience for people....
This quality not only makes the app more attractive to younger generations, it also drives user engagement. At the same conference, Schulman shared that users were opening the app multiple times each week just to "to see what their friends are doing." Of course, the more users engage with the platform, the more the service becomes a force of habit for users.
When will profits follow popularity?
In the company's 2016 fourth-quarter conference call, Schulman said Venmo played a very small role in PayPal's 2017 guidance, but he expects it to have a much bigger impact in 2018 and 2019.Even so, Pay with Venmo, the app that will allow users to pay for merchandise at online and physical retail locations with their Venmo accounts is expected to be rolled out this year.
Image source: Pixabay
The great thing about the Pay with Venmo roll-out is that it will not have to be tediously done one merchant at a time, but can be instantly integrated into PayPal's core platform infrastructure and launched everywhere simultaneously.This is exactly the same way thephenomenally successful One Touch was launched.
Beyond Pay with Venmo, however, PayPal is exploring other opportunities for monetizing Venmo's platform. PayPal COO Bill Ready described one such idea at the Morgan Stanley 2017 Technology, Media, and Telecom Conference when he shared how some retailers were already approaching PayPal about possible promotional activities on the app:
But it's also a place where merchants really want to engage as well. So you've seen that in some of our tests where we had -- Papa John came to us because they could see that the pizza emoji was one of the most commonly shared emojis on the news feed. We're seeing a lot of that type of thing where merchants are saying, "Hey, that's a great place for them to engage as well. So we're making sure we really dial that in." But as we've been testing that, we feel like we really, really are starting to get a bead on how do we bring that social engagement into a consumer-to-merchant purchase.
Given the platform's incredible popularity, growth, and levels of user engagement, it's hard to fault management for wanting to take their time with the opportunity before them. The unique social structure of a payment app makes Venmo a cultural phenomenon unlike anything the payments industry has ever seen. While this might require patience for PayPal management to carefully unlock its potential for profits without damaging the user experience, this should not dampen investors' enthusiasm.
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