PayPal Holdings (NASDAQ: PYPL) has been a huge winner in the growth of mobile commerce. Since 2012, PayPal's revenue has more than doubled, and total payment volume (TPV) has consistently grown more than 20% per year. One of PayPal's most valuable assets is Venmo -- a peer-to-peer (P2P) payment app that is very popular with millennials. Venmo's TPV grew more than 100% to about $30 billion over the trailing-12-month period as of the third quarter of 2017.
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These numbers understandably make banks feel uneasy. After all, PayPal's mission as a business is to democratize the flow of money, which implies that traditional banking hasn't been very customer-friendly. At the same time, every major bank and credit card company has been forced to partner with PayPal because of its growing 200 million-plus customer base.
While major financial institutions appear to be friendly with PayPal, behind the scenes big banks and credit card companies have linked arms to create their own version of Venmo called Zelle, and it's already surpassed Venmo in TPV.
Despite what you might think this doesn't spell trouble for Venmo. Below I will explain the distinguishing features of each service which will allow Zelle and Venmo to each settle into its own space within the wide open market of P2P payment services.
Zelle experiencing rapid adoption
More than 35 banks, payment processing firms, in addition to Mastercard and Visa, are backing Zelle, which launched about a year ago. In the first half of 2017, Zelle processed $33.6 billion of payments, covering more than 100 million transactions in just six months. It's rapidly being adopted by banking customers.
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Wells Fargo (NYSE: WFC) and Bank of America (NYSE: BAC) are two banks that are backing Zelle, and both have reported strong growth from the new service. Here's what Wells Fargo CEO Tim Sloan had to say about Zelle on the company's third-quarter conference call:
Since launching the Zelle person-to-person experience in June, we've seen significant growth in both the number of transactions and the dollar sent. In the third quarter, peer-to-peer payment sent by our customers increased 46% from a year ago.
Here's Bank of America CEO Brian Moynihan on Zelle's impact:
[O]ur volumes through Zelle this quarter were $4 billion in the third quarter. We processed nearly 14 million transactions and the growth continues. We recently processed $0.5 billion in a single week. Our customers are using Zelle and we look forward to further growth in that area.
The rapid growth of a new payment app backed by the largest financial institutions in the world makes the situation look shaky for Venmo, but this shouldn't concern PayPal investors.
Two reasons why: Venmo's social features, and a market opportunity that is too big for one service to capture.
Venmo's social feed is a powerful competitive advantage
First, let me tell you how Zelle works. Basically, anyone with a major U.S. bank account can use it. Zelle can either be accessed within the mobile banking app of accepted banks, or you can download the Zelle app on your phone. All you need to send money is an email address or phone number, and there are no fees for sending money.
Money sent with Zelle is directly deposited within minutes to the recipient's bank account. This is the key differentiator over Venmo, which serves more like a middleman between your bank and your money. When you send money with Venmo, the money sits in the recipient's Venmo account which has to be withdrawn to their bank, which typically takes one business day.
The convenience of Zelle's direct depositing is very appealing, but Venmo has a stickier service because of its social feed. With Venmo, friends can send messages, emojis, or split the bill by sending requests for money. The social features of Venmo is very powerful for attracting merchants to PayPal's payment platform. For example, when Venmo users buy something, they can type a message recommending what they just paid for. It serves as free marketing for the merchant, and merchants love it.
PayPal already has more than 17 million merchants signed up on its payment platform, and PayPal's relationships with these merchants should grow even stronger as the new Pay with Venmo feature can connect merchants with a coveted millennial demographic.
Zelle and Venmo are targeting different demographics
Venmo has gotten to where it is through millennial adoption, and given its ubiquity among that demographic, I don't see Venmo losing steam with that base. Zelle's lack of social features means it will probably appeal mainly to others who haven't tried mobile payment apps before. Banks could always update Zelle with additional features, but for now, the service is purely about sending money.
The opportunity for Zelle and Venmo is too big for any single service to capture all of it. In the U.S. alone, eMarketer forecasts mobile P2P payments to reach $244 billion by 2021, dwarfing the current size of either Zelle or Venmo, so expect to see both of these services, as well as additional entrants, continue to grow very fast.
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