Apple Takes Aim at PayPal's Venmo
This commentary originally was sent to Action Alerts PLUS subscribers on Nov. 12, 2015, at 10:32 a.m. ET. Click here to learn about this dynamic market information service for active traders.
The Wall Street Journal reported Wednesday that Apple (AAPL) - Get Report is in talks with banks to develop a mobile person-to-person (P2P) payments service, similar to that of PayPal's (PYPL) - Get Report Venmo mobile application. While key details of a possible deal with the banks are still in flux, it seems clear that Apple is trying to expand its digital payments offerings, which already includes Apple Pay. At a macro level, the discussions represent a shift by American consumers away from cash and checks toward more convenient payment options. According to the Journal's report, the P2P service is expected to be launched in 2016 and will be powered by Apple Pay.
On the Apple side, it isn't yet clear how the company plans to make money on the proposed service, but it is a move to expand its ecosystem and keep consumers loyal to the brand. By adding this additional mode of convenience, Apple customers will be more likely to use their iPhones and other Apple devices for everyday activities. The more consumers use and interact with Apple products, the more engrained the brand becomes in everyday life, making it tougher to ever break away from the company's grasp. Overall, while a P2P service is unlikely to affect Apple's already huge revenue base (regardless of how the company plans to monetize) in the near term meaningfully, it further enables the easy transfer of money via Apple devices and builds the stickiness of Apple's Holy Grail of products, the iPhone.
That being said, Apple's decision to enter the P2P payments space would certainly have an effect on the broader payments space, particularly on Venmo. While PayPal doesn't currently make any money off Venmo (except for a small amount from credit-card-funded transfers, which are a small portion of all Venmo payments), the mobile app is certainly one of the company's most precious forms of expected growth in coming years. PayPal management has indicated that it expects to test a "Pay by Venmo" service with merchants beginning in 2016, which would likely have a similar take-rate as the PayPal platform and add to the company's revenue base.
If Apple begins its P2P service, it would undoubtedly pressure Venmo's estimated 8 million to 15 million users (according to Piper Jaffray analysts) as the added convenience of being integrated with Apple Pay will be too hard to ignore. Whereas Venmo is currently only a P2P service, Apple Pay is already accepted by many merchants.
To its credit, Venmo has built a very loyal user-base among Millennials, largely by facilitating the conversations that go along with payments, appealing to the consumers' growing appetite for social media interaction on a mobile platform. The issue, in our view, is that many of these devoted users access Venmo on their Apple iPhones; should an Apple P2P service be released, we would not want to be Venmo competing against the tech-giant for customer loyalty.
All in, the announcement by Apple is definitely concerning for PayPal's growth prospects. Keeping in mind that both names are held in the Action Alerts PLUS portfolio, we have pointed out many times that increasing competition across all of PayPal's businesses has always been the main reason for apprehension among investors. While the company has done a good of job proving its value to its users, especially Millennials, the space is only getting more crowded by companies with larger scale and wider merchant acceptance.
Specifically for Venmo, we are concerned that the social aspect may not be enough to hold onto users once other companies begin to ramp up their P2P services, which will ultimately be bundled with their payment offerings that are widely accepted by global merchants. Even if users do remain loyal, it seems that PayPal's ability to monetize Venmo is becoming increasingly difficult as more mobile wallets begin to offer a P2P service and merchants are given the option to work with existing relationships.
We will have our eye on the developing situation as we continue to evaluate the strength of our investment in PayPal.
At the time of publication, Jim Cramer's charitable trust Action Alerts PLUS held a position in Apple stock.