No One’s Splitting the Bill, But Venmo Is Surging
The Covid-19 crisis shifted a large portion of American retail online virtually overnight, but the gradual post-pandemic reopening has led to an interesting second shift: Online payment companies have started moving offline. Last month, CVS Pharmacy announced plans to add PayPal and Venmo QR code payments in its 8,200 stores during the fourth quarter, taking a mobile-first brand right into the checkout line. The national retailer, which will be the first to accept PayPal and Venmo, said its goal with the multiyear deal was to keep consumers safe and encourage them to adopt touch-free payment. This follows a broader trend of platforms, including Amazon Pay and WhatsApp, offering up QR codes for merchants as an alternative form of going contactless.
As we’ve witnessed over the past six months, the pandemic didn’t just move more of the economy online — it forced the online and offline economies to blend together in unprecedented ways: Paper menus are out; QR code menus are in. Curbside pickup means that even offline commerce starts with an online order. Tens of thousands of small retailers that never before sold a single thing online found an e-commerce lifeline through Shopify.
With unemployment still at an all-time high, Venmo has been a way for consumers to avoid in-person banking and allow friends and family to support one another through accessible money transfers.
Many fintech companies that power e-commerce, like Square and Stripe and Ant Financial in China, are currently thriving, expanding their user base as more transactions start online or move online entirely. Then there’s PayPal, which posted its best quarter ever last month with a quarterly revenue of $5.3 billion, and its shares are up 90% in 2020. For perspective, in the second quarter of 2019, PayPal added 9 million active accounts. In the second quarter of 2020, it added 19 million, bringing its total active accounts to nearly 350 million users. That’s a 21% year-on-year growth.
Venmo, which PayPal acquired in 2013 as part of its $800 million purchase of Braintree, is largely responsible for helping to drive PayPal’s revenue growth. It processed $37 billion in total payment volume in the quarter, up 52%. The peer-to-peer payment app, founded in 2009 as a seamless way for friends to split bills, is popular for its emoji-heavy social feed and has helped PayPal maintain its dominance as the clear leader in online payments. So why the sudden surge when no one’s actually going out to dinner with friends? One theory: With unemployment still at an all-time high, Venmo has been a way for consumers to avoid in-person banking and allow friends and family to support one another through accessible money transfers.
Before 2020, “contactless payment” was just a novel feature bordering on a buzzword, but today it’s a legitimate public health issue.
The popular money app is banking that its social network will be a boon to small business owners: In early July, Venmo launched its Business Profiles feature that enables solo merchants to display a QR code at their point of sale and allows them to tap into Venmo’s social feed and search functions.
All these extra users gave PayPal more opportunities to cross-sell products, and its relatively quick reaction to the pandemic itself, including working with the federal government to disburse Payment Protection Program loans to merchants, meant that PayPal had time to prepare for the next phase of the pandemic economy: going cashless and taking on some of the more entrenched players in the contactless payment world.
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The pandemic touch-free payment boom
Before 2020, “contactless payment” was just a novel feature bordering on a buzzword, but today it’s a legitimate public health issue. Many businesses that are open look down on handling cash and reluctantly exchange plastic cards. According to a new survey, 54% of consumers feel concerned about using paper money and coins as a result of Covid-19. A payment option that doesn’t involve any physical touching is even safer.
By now, many customers are familiar with using their smartphones to make in-store purchases via Apple Pay, Google Pay, and Samsung Pay at merchants that have installed contactless systems. But investing in and setting up this point-of-sale equipment can be expensive, especially for small business owners. QR code technology — a two-dimensional bar code that smartphones can read to redirect users to a mobile webpage — offers an alternative form of touch-free payments for in-store shoppers, particularly low-income consumers or those without high credit scores.
PayPal, best known for its convenient and encrypted payment processing for online merchants and shoppers, is now angling to bring its touch-free services into brick-and-mortar stores. CVS is slated to become the first retailer to accept PayPal and Venmo QR codes at checkout. PayPal’s bet is that some of the habits consumers form during the pandemic will stick with them afterward. If you get used to paying with your phone, you’re less likely to leave home with a wallet, and once you’re out of the wallet habit, what would prompt you to return to it?
There’s a precedent for this. While QR code payments, and mobile payments more generally, are still rolling out in the United States, they’ve been widely adopted in other countries — most notably in China, where “over 90% of people in China’s largest cities use WeChat and Alipay as their primary payment method,” according to a Brookings report. For added perspective, China’s mobile payments totaled $9 trillion in 2016 compared to $112 billion worth of transactions in the United States in the same year.
A few weeks after the CVS deal was announced, Chinese payments giant Ant Group filed to go public. Ant, like PayPal, was originally an online-focused payment processor. It was founded as a subsidiary of Alibaba and quickly grew into a Goliath payment provider. Ant does almost all of its business in China and has grown so quickly that its annual payment volume is actually higher than China’s GDP. Ant’s growth has stemmed from two things: It does everything and works everywhere. Like PayPal, Ant’s Alipay product expedites online payments. And as with the CVS deal, Alipay can be used offline through QR codes — but it’s ubiquitous and is a default form of payment at businesses small and large.
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Ant has something else in common with PayPal: a large, growing competitor. According to one research firm, “[Alipay’s] share of China’s third-party payments market has fallen from three-quarters in the first quarter of 2015 to about half in the first quarter of this year.” The culprit: competition from TenCent’s WeChat, the popular Chinese chat app with an embedded payment system.
PayPal’s biggest competitor in mobile and contactless payment is Square’s Cash App. Square launched Cash App in October 2013 — four years after Venmo — originally with a business focus, but it expanded as a peer-to-peer product, making it a direct competitor. Cash App has been a triumph of peer-to-peer marketing: The brand has a whopping 1 million followers on Twitter, dwarfing Venmo’s 46,000, and has mastered the art of the celebrity giveaway, which requires users to sign up for Cash. Today, some investors estimate that the value of Cash App is as much as half of Square’s entire market value.
Payment providers are coming full circle
PayPal was created to take payments fully online, instead of hacking together an offline-first payment mechanism to settle online transactions. Square was built to help small businesses sell goods in person, not to expedite online purchases. But now, PayPal’s vast user base makes offline transactions possible, and Square’s aggressive marketing and rapid product iteration created one of the United States’ most popular mobile payment apps.
Payment businesses have strong network effects — more consumers mean more merchants, and vice versa.
Once referred to as the “crown jewel” of PayPal by CEO Dan Shulman, Venmo is increasingly second best in a winner-take-all business. Peer-to-peer payments are driven by a tight viral loop: Every payment produces a push notification for the recipient, so the most popular app tends to stay popular. Venmo’s early lead is dwindling as Cash App’s viral marketing kick-starts the feedback loop for more users.
Payment businesses have strong network effects — more consumers mean more merchants, and vice versa. And network effects have a trade-off: They mean that growth is high once the network is established, but it’s low when things are just getting started. (The first merchants have to use the app even though there aren’t customers, and vice versa.)
This encourages every payment company to start with a niche they can dominate, but it also encourages them to keep growing. And when offline payments briefly disappear and suddenly merge with online payments, offline- and online-focused networks suddenly find that they’re competing head-to-head.