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Why Millennial Favorite Venmo Is Paypal's Key to Future Success

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It would be an understatement to say that PayPal (PYPL - Free Report) has been successful since it spun-off from eBay (EBAY - Free Report) in 2015. Shares of the payment solution provider have more than doubled since it became its own entity.

Up until now, much of that momentum has been driven by PayPal’s main platform, used by people since eBay was the leader in e-commerce. That established reputation has led it to operating almost like a modern bank, offering lines of credit, a debit MasterCard (MA - Free Report) , and being accepted by most stores throughout the world.

However, the “FinTech” sector that PayPal is a part of is becoming progressively more crowded. In addition to direct competitors like Square (SQ - Free Report) , many traditional banks are entering the lucrative space. PayPal needs to be constantly evolving in order to not fall behind in the digital payments race. That is especially true as the spending power of innovation-seeking Millennials continues to grow.

Enter Venmo, PayPal’s less formal, mobile “peer-to-peer” payment app that allows for quick transfers of money between family and friends. Its convenience and accessibility makes it perfect for Millennials and younger generations who want to make casual transactions, like paying back a friend for lunch or a ride.

Another benefit of Venmo for users is that there are no transaction fees, while PayPal charges a 2.9% fee for all debit and credit card transactions.

Regarding Venmo’s Millennial demographic, PayPal CEO Dan Schulman stated in an interview with “Mad Money” host Jim Cramer, “It’s very important to them if they have their own independence, and these appls like Venmo are incredible powerful in helping and empowering them take care of their financial health.”

Moreover, since it is an app, new features and adaptations that capture the latest trends are effortless to implement. Strategic partnerships also further allow Venmo to stay ahead of the curve and remain relevant to young consumers.

The possibilities are endless for Venmo, as it can be a payment option in any industry that has straightforward exchanges of money. Uber and Abercrombie & Fitch (ANF - Free Report) are just two examples of Millennial-loved companies that Venmo has recently partnered with. These moves are part of a larger “Pay with Venmo” initiative, a long-term strategy to monetize Venmo.

PayPal’s latest quarterly report proved the increasing significance of Venmo and mobile payments to the company. The app processed $14.2 billion in volume, soaring 78% year over year. Payment volume over the past 12 months amounted to $46 billion.

Concerns

Of course, mobile commerce becoming more popular means that Venmo will have to deal with the same competitors that PayPal already has. Square has its own mobile app, the Cash App, and Zelle is a payment app backed by major banks.

But competition may not be too much of an issue moving forward. Society transitioning to using less cash leaves room for many players in the digital payments industry as a whole. But more specifically, people’s attachments to their smartphones could make mobile commerce reign supreme.

A bigger challenge may be dealing with privacy matters for users. Currently, many transactions are visible on a public newsfeed by default. Anyone can see the people involved in these public payments, when it happened, and the reason for it. The only thing not shown is the amount.

However, the feature allows Venmo to transcend payments and become a kind-of social media for sending and receiving money.

Bottom Line

While PayPal’s roots are in financial services, it is more or less still a tech company that needs to be dynamic. Venmo can expand in ways that PayPal can’t, making it an instrument for innovation.

The app is a valuable asset for PayPal to fight stagnation, target younger generations, and tap into the high-growth potential mobile payment market. It may not the primary source of PayPal’s revenue yet, but it could be a crucial part of the company moving forward.

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