PayPal Scores an AmEx Tie-Up And Notches a Strong Quarter, Though Challenges Loom

In a reversal of its past practice, PayPal Holdings Inc. began two years ago working with competitive and semi-competitive partners, and on Thursday it added the last major U.S. card network to that list by announcing a tie-up with American Express Co.

PayPal executives also disclosed the company’s performance numbers for the third quarter, underscoring strong growth and also addressing challenges stemming from its new relationship to eBay Inc. and from the sizzling growth of its Venmo peer-to-peer payment service.

The AmEx agreement, which will unfold over the coming year, will allow AmEx cardholders to use PayPal and Venmo payment services and add their cards to the PayPal wallet. Users will also be able to spend AmEx membership rewards points at PayPal merchants.

“It will be a deep integration of PayPal and Venmo [peer-to-peer payments] within the AmEx platform,” PayPal’s chief executive, Dan Schulman, told analysts Thursday afternoon during the company’s third-quarter earnings call. “And there will be enhanced access to American Express in our wallet. We’ll be rolling it out to our mutual customers.” Schulman was an executive at AmEx before taking over at PayPal in 2015.

Since its landmark pact with Visa Inc. in 2016, PayPal has now forged a total of 37 such partnerships. This latest deal with AmEx is clearly aimed at a tight integration that should boost transactions for PayPal, much like an earlier deal with Walmart Stores Inc., which calls for PayPal money services, including cash withdrawal, to be available in all stores. “We’re working hand-in-hand with Walmart,” Schulman said during Thursday’s call.

PayPal also highlighted Venmo’s growth. The service continues to sizzle, even in the face of competition from the 16-month-old Zelle P2P service, owned and operated by the nation’s biggest banks. Venmo generated $16.7 billion in volume in the quarter ended Sept. 30, up 18% from the second quarter and 78% from a year ago. The current run rate is near $70 billion in annual volume, Schulman said.

But Venmo transactions are free to users, posing a challenge for PayPal as the service continues to grow. The company’s third-quarter transaction take rate, the portion it retains on each payment, fell 14 basis points in the quarter to 2.34%, in part because of Venmo’s no-fee traffic, executives said.

To generate revenue on the service, PayPal has introduced Pay With Venmo, which allows users to make purchases online from merchants, and a cobranded Venmo card that does the same thing at brick-and-mortar stores. More than 2 million merchants now accept Pay With Venmo, PayPal said.

“We have a very strong pipeline of merchants lining up to integrate Pay With Venmo buttons,” Schulman said. “And the Venmo card is off to a strong start.” The card, he added, showed a 32% growth rate in monthly users between August and September, though he didn’t disclose the actual number. Much of their spending, he said, is being done at restaurants and grocery stores.

All told, some 24% of Venmo users have “participated in a monetizable transaction,” Schulman said, up from 17% three months ago and 13% in May.

PayPal also moved earlier this week to squeeze more revenue from its P2P service by jacking up the fee for instant transfers from 25 cents to 1% of the amount, with a 25-cent minimum. The fee applies to fast transfers of cash from a Venmo account to a linked bank account; ordinary transfers are free.

Another issue Schulman confronted is the decision by the eBay marketplace to begin processing transactions on its own platform, relegating PayPal to one of a number of payment alternatives. Schulman downplayed the potential impact of this move, which is still unfolding at eBay. Intermediated payments, the term eBay uses for its new program, “has just started for them. There’s no impact on our platform,” Schulman said.

He added that the eBay sellers who also take PayPal are insisting on keeping PayPal as a choice. “Their sales depend on it,” he told the analysts on the call. As for PayPal merchants who have moved to eBay’s platform, they are “clamoring to come back to PayPal,” Schulman said. Still, overall, Schulman said, “We feel great about our eBay partnership.”

PayPal had a strong quarter statistically. Active accounts grew 15% year-over-year to 254 million, including 20 million merchant accounts. Total payment volume reached $143 billion, up 25% year-over-year. That number includes $57 billion of mobile volume, up from $54 billion in the second quarter and $40 billion a year ago.

Customer engagement, measured as payment transactions per active account, was 36.5, up 9.5% from a year ago.