Why fintechs will be watching Venmo’s credit card

PayPal’s latest move to jolt Venmo’s revenue is a co-branded credit card developed with Synchrony — something that challenger banks and fintechs may rush to compete against.

The Venmo/Synchrony card will debut in late 2020, and is designed to benefit from both Venmo’s popularity as a social peer transfer app and Synchrony’s analytical acumen. It also enhances Venmo’s position as a source for credit in addition to P2P payments.

The addition of lending or credit is a natural next step — one that PayPal's rivals have already begun to take.

Andrew Harrer/Bloomberg

Stripe, for example, has issued virtual cards through partnerships. Stripe’s valuation gives maneuverability to offer more traditional financial services, which can pair with Stripe's other moves to extend its geographic and product reach.

Square sold its food delivery service Caviar in part to free up resources for Square Cash, a P2P offering that competes with Venmo. Square, which did not return a request for comment for this story, recently reported strong growth for Cash despite overall earnings that disappointed investors.

Ride sharing apps such as Uber and Lyft have also pursued credit cards as part of a broader diversification into financial services in the mobile ride-sharing market.

While these firms have different models, the need to demonstrate fiscal viability to investors through a revenue stream from a credit product is the same. Digital payments acceptance, social P2P transfers and ride hailing have become commoditized.

“This is a trend that we will start to see with online only banks, neo and challenger banks that are offering banking or banking-lite services at no cost,” said Sarah Grotta, director of debit and alternative products advisory service at Mercator. “At some point investors will want to see some revenue growth, and adding credit cards and lending options is one approach.”

PayPal has made Venmo a star attraction in an attempt to capitalize on the app's large user base, which has not resulted in Venmo's profitability.

Venmo recently linked to Amex to power bill-splitting and paying through incentive marketing points. Venmo also enhanced its instant transfer feature to quickly moves funds from the Venmo app to a user's bank account.

PayPal also linked Venmo to HyperWallet, another fintech that PayPal purchased, to support sharing economy payments and financial services.

There are signs that these efforts are bringing elusive revenue for Venmo, which recently reported 70% year-over-year payment volume. It also reported 40 million users, a consumer base and merchant network that could potentially fuel adoption of a credit card.

“Venmo has a loyalty base of P2P, a smaller contingent of ‘Pay with Venmo’ users and now they want to extend Venmo to credit as well,” Grotta said. “PayPal has been focused of late on improving the profit picture for Venmo, and adding credit should certainly help.”

PayPal is hoping to deepen relationships with younger consumers, long Venmo’s sweet spot, by adding a credit option.

“Millennial cardholders are looking for leading-edge digital capabilities like around-the-clock access, personalization, simple but powerful mobile apps with granular controls and alerts, and rewards,” said Joe Gallo, a spokesperson for PayPal, in an email.

PayPal is also leveraging the Venmo app as a marketing tool, according to Talie Baker, a senior analyst at Aite Group.

“They do the same thing with PayPal. You can apply for a PayPal credit card in the app or online. It also helps get the Venmo name out with a Venmo-branded credit card. All good ideas from a marketing perspective,” Baker said.