Facebook Inc (FB) Plays Second Fiddle to Venmo, PayPal (PYPL) in Social Payments

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Facebook Inc (FB) has rapidly become one of the most disruptive companies in the world. In an effort to keep users within its “walled garden,” the social network is luring publishers to its platform, betting big on video and taking on Yelp (YELP) with local restaurant reviews.

Facebook Inc (FB) Plays Second Fiddle to Venmo, PayPal (PYPL) in Social PaymentsFB is also trying to become a player in social peer-to-peer payments, a rapidly growing industry with sky-high potential. Thing is, PayPal (PYPL) already has a strong first-mover advantage in that market through its popular P2P social payments app, Venmo.

Given Venmo’s ubiquity and popularity — especially among the more tech-savvy, mobile-friendly millennials — Facebook may have a tough time catching up to PYPL.

200% Growth

PYPL, which split from online marketplace eBay (EBAY) back in July after years of pressure to do so by Wall Street activists, has a gem in Venmo, a six-year-old application used primarily by millennials to settle small debts and split bills between each other.

Two years ago, PayPal bought Braintree, a payments software company that had acquired Venmo, for $800 million. Venmo’s total transaction volume in the third quarter was $2.1 billion, or only 3% of PYPL’s total payment volume of $69.74 billion last quarter.

That may sound like peanuts, but all you have to do is look at how quickly Venmo is growing to realize why this app is so important to PYPL. In Q3, Venmo’s payment volume was up around 200% year-over-year.

FB wants in on this high growth, and recently rolled out a payments feature in its popular Facebook Messenger app. Apple (AAPL) and Alphabet (GOOG, GOOGL) also have aspirations in the peer-to-peer payments area.

While PYPL is competing against a veritable who’s who of Silicon Valley tech giants, Venmo has one clear advantage over all the new entrants: It was there first. And users trust it.

The vast majority of Venmo users don’t pay a thing to transfer money around with the service, because their Venmo account is linked to their bank account. Venmo charges a 3% transaction fee for credit card transactions, that’s it.

PYPL doesn’t break out user numbers for Venmo, so it’s impossible to say how large the installed base is, but analysts expect it’s somewhere between 3.2 million and 15 million people. Sure, that’s dwarfed by Facebook Messenger’s 700 million users, but if you think a large portion of those people will be comfortable handing over their bank account information to FB, you’ve got another thing coming.

While PYPL isn’t currently making boatloads of cash off its successful service, it has gained the trust of its users, and it’s starting to take the next steps towards major monetization. Namely, Paypal is working on connecting Venmo to PayPal’s massive network of merchants, allowing Venmo users to make one-click mobile purchases in addition to splitting the dinner bill.

If executed well, that’s where Venmo could start to really make a material difference in PYPL revenue growth. It’s also the second advantage (the first being the first-mover advantage) that PayPal has over Facebook, which doesn’t have the merchant connections PYPL does.

At the end of the day, Venmo’s easy-to-use, trustworthy and social qualities will continue to help it expand its user base. Now all PYPL has to do is connect the merchants and watch the money pour in.

Sorry, Facebook. You can’t win at everything!

As of this writing, John Divine was long AAPL stock. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/11/facebook-inc-fb-pypl-venmo-mobile-payments/.

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