CASE STUDY: How Venmo evolved from a P2P powerhouse into a full-suite commerce engine

Challenge

PayPal has long been a commerce enabler, offering highly popular services like PayPal OneTouch, a buy button with a wide reach in addition to loyalty and conversions that far surpass the competition's. But it's also a leader in the digital peer-to-peer (P2P) payments space, which is poised to grow at a 42.7% five-year CAGR to hit $574 billion by 2023, as a wider set of users turn to PayPal apps, including Braintree-owned Venmo, for fast, simple, and convenient ways to pay their friends and family. As digital P2P grows, and users continue to spend and buy online more than ever, PayPal has identified an opportunity to grow its commerce presence onto another platform, expand the services it offers, and better serve its customers in a time where returns and margins are shrinking across the payments space. Business Insider Intelligence spoke to PayPal COO Bill Ready about how the firm is working to evolve Venmo — one of the most "beloved" apps in the millennial demographic and a P2P market leader — from a P2P offering to a full suite commerce engine.

Even before it was acquired by PayPal, Braintree always intended to turn Venmo into a platform that consumers could use to pay for "anything," per Ready, with P2P as the first use case. It soared to success: Quarterly volume more than doubled annually for years, and the service is on pace to drive $100 billion in volume in 2019 — equivalent to 17% of PayPal's 2018 total payment volume (TPV). As consumers integrated Venmo into their lives, they began using it to enable commerce in their own ways, predominantly through cost-splitting: One customer might pay for an Uber ride or a dinner out using their credit or debit card, and then split the cost among the group later using Venmo.

These use cases were excellent catalysts for Venmo's growth because of their ability to bring both volume and new users to the service as entire networks of peers signed on. However, they also created a missed revenue opportunity for PayPal: Venmo was seeing largely secondary volume in the commerce space, since it was used to help consumers pay for things but didn't interface with merchants directly. At the same time, PayPal was hearing from merchants that they wanted deeper connections with their customers and stronger ways to acquire or engage with the customers they were missing out on due to friends splitting costs on the back end, according to Ready.

Strategy

As part of a push to realize its broader goals, Venmo "closed some of the gaps" in how users were paying by more seamlessly allowing them to originate payments within Venmo or access the funds in their accounts more quickly to spend through other channels, Ready explained to Business Insider Intelligence. These tools "make it easier for users to do what [they] were already doing."

Pay With Venmo allows users to pay with their Venmo balance, associated card, or bank account. It has expanded to millions of e- and m-commerce merchants, including partnerships with major e-commerce firms like Bigcommerce and Shopify and with sellers like Uber, Grubhub, and Hulu, targeting use cases that were already popular. For example, Ready noted that the firm saw over 6 million people talking about Venmo and Uber together in the app's feed, creating a natural partnership opportunity where users could pay and split the cost using Venmo directly in the Uber app.
The physical Venmo card allowed the service to move in-store. Users can make purchases "pretty much anywhere that Mastercard is accepted" and then split them in the app, allowing Venmo to realize physical commerce that was being split behind the scenes. For both Pay With Venmo and the physical card, merchants pay per-transaction fees comparable with those for other PayPal transactions, which are often slightly lower than other card-related fees, according to Ready.
Instant Cashout allows users to access and spend their funds faster. Users can pay a nominal fee (initially 25 cents, then changed to 1%) to move money from Venmo to their bank account or card "in a matter of seconds," allowing them to spend those funds instantly.

Result

Venmo has seen "phenomenal organic uptake" of these new services, according to Ready. In Q4 2018, 29% of Venmo users had engaged in a commerce-related function, up from 17% in July 2018. Much of that is happening organically within partner apps like Uber or Grubhub, where users are paying and splitting the cost directly within the commerce engine. This represents what Ready calls a "win-win for everyone." Users accustomed to a free Venmo get a "great experience at low or no cost" and can use the platform more often. At the same time, merchants access a deeper connection and more visibility into customers at a "great bargain" — sellers have "always" been willing to pay for acquisition, and Venmo's fees are often lower than interchange assessed by card networks. And Venmo, which is expected to generate $200 million in revenue next year (1.3% of PayPal's total 2018 revenue) is moving toward a position where it will become less of a drag on PayPal's take rate and ultimately turn a profit.

Our Take

For providers, P2P has always been a tough nut to crack because customers want it for free and, though it can serve as a great customer acquisition engine and loyalty tool, it often comes at a financial loss. Moving into commerce to realize dollars that were indirectly being spent on the platform is a smart way of making these services more lucrative: Ready noted that most "freemium" providers expect 10-15% of customers to convert to paid users, and Venmo is already at nearly one-third. Venmo's added offerings have been particularly successful in this regard because of its large and loyal audience, simple experience, and effective use case; the services that have enabled Pay With Venmo are natural use cases for the platform. But it isn't the only player making these moves: Square Cash, for example, also offers a physical and virtual debit card as well as instant cashout options. But to execute this strategy effectively, especially as the P2P space becomes more fragmented, providers need to ensure that they build out a wide acceptance network at merchants that appeal to their core user base, add value through speed and convenience, and offer a simple user experience that convinces users to test new features.

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