Should Venmo Buy a Bank?

by Joseph Walent 0

PayPal and its subsidiary Venmo have been able to succeed and grow without encumbering themselves with bank capabilities and the accompanying regulatory requirements thus far. PayPal recorded revenue of $9.2 billion during 2015 with full-year growth of 15%, securing consistent operating margin of 16% for the full year and the year prior. That said, there is a feeling that the company may be leaving money on the table.

For PayPal—which declined to comment—or its Venmo subsidiary, a bank would bring the ability to offer a wider range of financial products to customers. During PayPal’s last earnings call, CEO Dan Schulman hinted that Venmo users would be able to “eventually access a host of other basic financial services.” (A Venmo spokeswoman declined to elaborate.)

Currently, Venmo, and PayPal access ACH transfer via their sponsoring banks, but as the volume of activity increases, PayPal management will likely be considering the idea of a bank acquisition as part of a cost reduction strategy that would keep the cost of ACH in house, with the added benefit of being able to offer those other basic financial services referred to above.

Mercator Advisory Group anticipates PayPal will eventually make a strategic purchase of a bank, but will delay the acquisition until its ability to generate comparable organic growth under its present model has been exhausted. Then expansion of growth avenues and expense savings will justify being subject to more intensive regulatory oversight to maintain its growth trajectory and preserve profitability.

Overview by Joseph Walent, Senior Analyst, Emerging Technology at Mercator Advisory Group

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