While Lauding a Strong Quarter, PayPal Brass Looks to ‘Monetize’ Venmo And Launch NFC

With Venmo accounting for a swiftly growing share of PayPal’s total payment volume, the company’s top brass left no doubt on Thursday they are eager to start making the peer-to-peer payment service start paying its way. “We [now] begin to monetize Venmo,” PayPal chief executive Dan Schulman told equity analysts on an afternoon conference call to discuss the company’s third-quarter performance.

The first step in that movement took place earlier this week with an announcement that as many as 2 million PayPal-accepting merchants are now eligible to take Venmo online and in-app. PayPal will collect the same merchant fees on these transactions as it does for PayPal payments, a fact top executives were quick to emphasize on the call. These fees start at 2.9% plus 30 cents and decline with volume.

That means Venmo, which is free for P2P payments, will start producing measurable income fairly soon, they said. “We do have some modest expectations with respect to Venmo monetization next year,” said John Rainey, PayPal’s chief financial officer. But the margins on Venmo transactions should be better than on regular PayPal payments because the company’s funding costs are lower than they are for the PayPal wallet, which users can fund with credit cards. Funds for the Venmo wallet, almost by definition, come from the user’s friends and family. “The cost per transaction is less,” noted chief operating officer Bill Ready.

All this is important to PayPal because Venmo’s wild growth has it accounting for more and more volume. That’s eating into the companywide share of each transaction that PayPal keeps as revenue, a measure known as the take rate. Venmo generated $9.4 billion in the quarter ended Sept. 30, up from $8 billion in the second quarter and a 93% increase over the same period in 2016. That’s enough to account for 8.25% of the company’s total $114 billion in payment volume.

The take rate, a measure analysts watch closely, came in at 2.84% for the third quarter, down 11 basis points from the June 30 quarter. PayPal blames not only P2P payments, including Venmo, but also the inclusion this quarter of results from TIO Networks, a bill-pay network PayPal acquired earlier this year.

But monetizing Venmo is far from the only move Schulman has in mind. As he has indicated in previous earnings calls, he plans to move PayPal to the physical point of sale very soon. With access to tokenization via agreements struck last year with Visa Inc. and Mastercard Inc., he said Thursday, “next year we will start to move into the offline world. Our PayPal wallet will have the capability to be used at the points of sale that have [near-field communication] solutions.”

He’s also open to looking at more acquisition targets. Besides TIO, for which PayPal shelled out $233 million, the company in August agreed to buy Swift Financial Corp., a lender to small businesses, for an undisclosed price. “You can expect us to be acquisitive but in a thoughtful manner,” said Schulman, who pointed to the $7 billion sitting on PayPal’s balance sheet and $3 billion free cash flow.

All in all, the yardsticks by which PayPal measures itself yielded encouraging results for the quarter. Active accounts grew by 26 million year over year, to 218 million, including 200 million consumer accounts and nearly 18 million merchants. Revenue totaled $3.24 billion, compared to $2.67 billion a year ago. While total payment volume was up 30% year over year, mobile volume leapt 54% to $40 billion, and now accounts for more than a third of total volume.

Transactions per active account, a customer-engagement statistic that PayPal watches closely, came in at 32.8, up 9% from 30.2 in the year-ago quarter.