Watch Out, PayPal -- Apple May Be Taking on Venmo

Apple is reportedly working on its own peer-to-peer payments service that would be a major threat to PayPal's fast-growing Venmo.
By Rebecca Borison ,

Venmo, PayPal's person-to-person payment system, has been an exciting addition to PayPal's (PYPL) - Get Report portfolio, with the company routinely citing its fast growth, especially among younger consumers. But it's looking like Venmo may be facing some serious competition in the next year or two.

Apple is reportedly working on its own peer-to-peer (P2P) payments service, according to The Wall Street Journal. Sources told The Journal that Apple (AAPL) - Get Report is talking to U.S. banks, and though the details have yet to be ironed out, it seems like the resulting product would be quite similar to Venmo.

Apple declined to comment on this report.

Apple was granted a patent for such a service in July. The patent outlined a system that lets two iPhone users with Touch ID transfer money from one user to the other. Though certainly not all patents become a reality, the report from The Journal gives more information on what Apple may actually be planning.

Adding a peer-to-peer payment service would certainly make a lot of sense for Apple, now that it's been pushing Apple Pay. While Apple has yet to share any numbers on how Apple Pay is performing, a survey from PYMNTS.com and InfoScout found that only 13% of eligible Apple Pay users had actually tried the service.

"Adding a P2P feature would give Apple another feature in Apple Pay, enabling the easy transfer of money between friends that could help the stickiness of iPhone," Piper Jaffray analyst Gene Munster wrote in a note Wednesday evening.

PayPal's shares were down 3.4% in late morning trading on Thursday.

It's important to note, though, that nobody seems to have really figured out a way to monetize the peer-to-peer service. In addition to Venmo, Square, Snapchat, Google and Facebook also offer users a way to make payments between themselves.

"There's no revenue model," said Larry Berlin, an analyst at First Analysis Corp. "If [Apple] charges people a quarter [per transaction] even, and it's free on Venmo, they'll use Venmo.

Munster acknowledged that peer-to-peer payments likely wouldn't have too big of an impact to Apple's overall business, he didn't see any downside to it either. Adding a useful feature to iPhones would help tie users to Apple's products and services, as Munster noted.

However, the news would certainly add pressure to Venmo, he said.

"The announcement by Apple is definitely concerning for PayPal's growth prospects," said TheStreet's Jim Cramer, Portfolio Manager of the Action Alerts PLUS Charitable Trust 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."

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"While we don't comment on rumors or speculation, at PayPal, we welcome any development that encourages people to address the awkwardness of dealing with cash when paying friends or family back," said PayPal spokesman Anuj Nayar.

While Venmo has yet to really contribute monetarily to PayPal's (PYPL) - Get Report overall business, the company recently announced that it plans to monetize Venmo by letting merchants accept it through a service called Pay by Venmo and charging them a fee. 

"We believe PayPal's opportunity with Pay by Venmo will be negatively impacted by Apple's P2P offering," Munster said. And Pay by Venmo already has a host of direct rivals, including Samsung Pay, Android Pay, Chase Pay, Google Wallet, MCX, Fiserv's Popmoney, Visa Checkout, MasterCard Masterpass, and AMEX Express Checkout.

"While we think highly of Venmo for P2P, we remain unsure of the value proposition and need for Venmo to improve upon the payments experience for consumers or merchants," Munster said.

PayPal and Venmo do have one advantage over Apple, were Apple to come out with a competing service.

"More than half of America doesn't have an iPhone," Berlin said. "Everybody can have PayPal."

PayPal pointed to Venmo's popularity in its recent earnings call, saying that Venmo had processed $2.1 billion of PayPal's total payment volume in the third quarter, up from $1.6 billion during the previous quarter. The company said that Venmo is "one of the fastest growing apps in the world by dollar volume."

Apple's move would build on its existing relationships with the biggest U.S. banks: Bank of America, Citigroup, JPMorgan Chase, Wells Fargo and PNC already support Apple Pay, for example.

It would also support the banks' strategy of steering customers toward digital services, which are typically cheaper for the banks to provide and more convenient for their customers.

Such options are particularly in demand among millennials, the largest generation in U.S. history, with a population of about 92 million.

By the end of September, Charlotte, N.C.-based Bank of America had 18.4 million active mobile customers, and CFO Paul Donofrio said about 40% of all its consumer deposits are made with mobile devices.

Mobile processing "is one-tenth the cost relative to processing in financial centers and more convenient for customers," Donofrio said.

At San Francisco-based Wells Fargo, active mobile customers rose 17% in the third quarter, CFO John Shrewsberry said on an October earnings call.

Several banks have already teamed up to provide clearXchange, a digital payments network that began offering person-to-person transactions in June. Owned by Bank of America, Capital One, JPMorgan Chase, U.S. Bank and Wells Fargo, the service allows payments between its members' 100 million customers. To operate it, both parties must have bank accounts, and payers must provide a recipient's e-mail address or mobile phone number.

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