Venmo’s New Debit Card Is About More Than Cashing in on Interchange Fees

While the opportunity to earn interchange on transactions made on its new Venmo debit card seemingly answers the oft-asked question of how PayPal Holdings Inc. plans to leverage its free peer-to-peer payment service, the full answer runs much deeper.

Interchange is only one piece of the puzzle. A much larger opportunity exists for PayPal to leverage the messaging capabilities within Venmo to strike more lucrative deals with merchants, payments experts say.

“While interchange earned from transactions made with the Venmo card [is] unlikely to put Venmo in the black, the real long monetary opportunity for Venmo is through merchant partnerships and integrations,” says Rachel Huber, an analyst with Pleasanton, Calif.-based Javelin Strategy & Research’s payments practice. The card is issued by The Bancorp Bank.

One such opportunity for Venmo is to sell space for merchants to create personalized marketing messages for Venmo users, says Richard Crone, principal at Crone Consulting LLC, a San Carlos, Calif.-based financial-services consultancy.

“That’s what will eventually drive Venmo,” Crone says. “With that kind of offering, Venmo will have a powerful tool it can use to open up the point of sale in a variety of ways.”

Introducing a debit card for in-store transactions also builds on an effort PayPal has already made to extend Venmo’s utility to retail transactions. Last fall, the payments company introduced Pay With Venmo, a service that lets users pay any of PayPal’s 2 million online merchants directly from their Venmo wallet.

The Mastercard-branded Venmo card is accepted at all Mastercard locations in the United States and can be used to make withdrawals at Mastercard, Cirrus, Pulse, or MoneyPass ATMs. Cardholders can withdraw up to $400 daily. Cardholders making withdrawals at non-MoneyPass ATMs will be charged $2.50. There is no fee for withdrawals made from MoneyPass ATMs.

Venmo, which did not make an executive available for an interview, previously tested a Visa-branded debit card in a venture that started late last summer.

Adding a debit card to its arsenal can also increase Venmo’s brand awareness among e-commerce merchants. “As more consumers use the card, merchants will become familiar with the brand and recognize that they may need to add Venmo as a payment option on their Web site,” says Talie Baker, a senior analyst for Boston-based Aite Group. “This allows Venmo to cross over into e-commerce.”

Cardholders’ purchases will be visible in their Venmo transaction history, which allows cardholders to split a purchase with other Venmo users or share information on the feed about what they bought.

Although Venmo has publicly stated the card is initially being rolled out on a limited basis, Crone expects the card to surpass more than 1 million cardholders because of Venmo’s large user base. Venmo is estimated to have 7 million active monthly users, according to Verto Analytics Inc.

The card features contactless capability, which will pave the way for Venmo to migrate the card to mobile wallets, where messaging feeds and offers from merchants can be easily managed, Crone adds.

While other P2P payment services such as Square and Apple Pay have also rolled out debit cards, don’t expect a card from Venmo’s biggest rival, Scottsdale, Ariz.-based Early Warning Services, which manages the Zelle service.

The company says no plans are in the works for a Zelle card. That’s not surprising considering the network includes some of the nation’s biggest banks, which have existing debit card franchises to protect. “It would be tough for Zelle to sell their bank members on a card that competes with branded debit cards,” Crone says.