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Cardlytics ($CDLX): Best Case Scenario with Venmo

How the size and likelihood of the best case scenario with Venmo could increase for Cardlytics and Dosh.


For all my notes on CDLX, check out my Qualitative and Quantitative “Research Notes”:


This was first published on Substack and discussed on YouTube on 7.15.2021. Republishing on my website as a backup.


Introduction

In the previous two write-ups (investor day, value of Venmo Offers), I described elements around Venmo Offers (powered by Dosh, acquired by Cardlytics in March 2021), and how it could impact Cardlytics.


Having Dosh offers on Venmo could lead to significant revenue and gross profit (lower revenue share than with the large banks) for Cardlytics. This is due to Dosh earning revenue when there is a purchase made in Venmo where there is an associated offer. However, until recently, offers seemed limited to payments made with the Venmo debit card, and only one retailer using QR codes. This led to assumptions of very little contribution from Venmo.


In order for Cardlytics to fully benefit from Venmo, the number of users wanting and choosing to make payments with Venmo over other options must increase, the ability to make a payment has to grow, and the number of payment methods that Cardlytics / Dosh covers must expand to as many if not all that is possible.


The areas I have spent additional time thinking and researching have been in regards to Venmo QR codes and Venmo Checkout Button. With these features, the probability of higher payment volume increases substantially, leading to increased value from Venmo + Dosh, and significantly higher value for Cardlytics. These both will be discussed in greater detail below.


Why This Is Worth Thinking About

With 70M MAUs on Venmo, and growing at a high rate, Venmo could contribute a large portion of revenue to Cardlytics in the future. Upon that, it has been mentioned that revenue share is lower compared to other bank partners, leading to higher gross profit levels.


We can think in terms of scenarios and expected value, with the following factors to increase the size and likelihood of a positive outcome for Venmo / Cardlytics:

  1. More users choosing to make payments with Venmo (increases size)

  2. More Venmo payment options (increases likelihood)

  3. Payment method offers covered by Dosh / Cardlytics (increases size)

Cardlytics ($CDLX): Best Case Scenario with Venmo

With all of these occurring and growing, both the size and likelihood of the best case scenario increases with Venmo for Cardlytics, and could far exceed my previous assumptions.


More users choosing to make payments with Venmo (increases size)

As more users make payments with Venmo, it will increase the revenue potential for Dosh and Cardlytics.


When making a payment, customers have the option to use cash, debit cards, credit cards, other mobile wallets, and more. Even if you are able to make a payment in any store or online with Venmo, that does not guarantee users will use Venmo over existing method. However, if we look at other countries utilizing companies like Alipay and WeChat Pay, we could estimate the future for Venmo utilization from assuming similar usage.


In the previous write-up, we discussed why users would want to use Venmo to pay with features such as splitting (a feature other users have wanted when interviewed, but will need intuitive and frictionless capabilities for utilization). Further utilization could also come from simply adding Dosh offers to all Venmo payment types, incentivizing that transaction type and use of Venmo.


In addition, and what will be discussed more below, are the benefits of QR codes at restaurants as an additional reason for increased utilization.


More Venmo payment options (increases likelihood)

In terms of the ability to make a payment with Venmo, even if a Venmo user wants to use Venmo to pay, such as to split payments with other Venmo users at purchase (as opposed to post purchase), if that shop does not accept a Venmo payment method (or one the customer has), then it will not matter if the user wants to use Venmo, since they cannot.


If you think at the extreme low end (a helpful thought exercise in many areas), of no retailer accepting Venmo as a payment option, then there would be no way to pay with Venmo, and no way to make purchases where there are Dosh rewards, and ultimately no additional revenue benefit for Cardlytics. Therefore, the ability to make payments must expand. Areas where this is already occurring are:

  • Venmo debit and credit cards (accepted nearly everywhere, but not used or owned by many Venmo users)

  • Businesses using Venmo QR codes with existing point of sales systems (small now)

  • Venmo business profiles (small for now, but could increase with SMBs and specifically within service business - discussed below)

  • PayPal rolling out Zettle to accept Venmo and cover more in-store payments (would allow all Venmo users to pay via QR code, but adoption rate by retailers is unknown)

  • Venmo Checkout Button (acceptance is almost anywhere PayPal is accepted - discussed below).

As the number of options available to make a payment with Venmo expands, the probability of using Venmo for payments increases.


Conversely, you can have every option possible and Venmo accepted everywhere, but still have users choosing to pay with other methods. Therefore, still need the first opportunity of increasing the desire to use Venmo to make a payment.


Dosh / Cardlytics covering more payment method offers (increases size)

Currently Dosh only powers offers for the Venmo debit card and Venmo QR codes. There is a high probability of Dosh / Cardlytics covering all Venmo payment types, or at least more than today, based on comments made at investor day.

“Our continued focus on growing our Venmo partnership…the team is focused on expanding rewards to additional payment types, creating a rewarding experience with Venmo, regardless of what payment instrument the consumer uses…We will also continue to invest along with product in our teams, supporting the build and partner integrations for enhancements, including currency conversion, pay with QR code currently live at Venmo.” - Farrell Hudzik, Executive Vice President, Financial Institutions, Cardlytics Investor Day Presentation - Farrell Hudzik, Executive Vice President, Financial Institutions, Cardlytics Investor Day Presentation

It is easy to assume that no matter the payment type that Venmo comes out with, Dosh will likely have the ability to service offers on those payment methods. However, given Dosh offers are not integrated with the Venmo credit card, offers on all of Venmo payment types may not be guaranteed. It’s possible that Venmo is waiting to see the success of Dosh offers as the rewards section for their debit card and QR codes. If it does well, maybe they will add the Dosh offers to their credit card. This is worth monitoring, as it may give the first clues to whether Dosh will service offers on all of Venmo’s payment options.


QR Code Success in Other Countries

A reason we could see significantly higher usage of Venmo to make payments in the future, is due to the high utilization rates seen in other countries via QR codes.

"…only 13% of consumers in the U.S. used QR codes on their mobile phones prior to the pandemic. The pandemic has added an additional 11%.
Compare that to countries such as China, where pre-COVID, roughly two out of three consumers were using QR code payments, with payment platform behemoths Alipay and WeChat Pay using QR code technology as part of their core business."1

The probability of higher usage of Venmo payments via QR codes seems high if Venmo can replicate what Alipay and WeChat pay has accomplished and implemented. We are already seeing some early signs of adoption of Venmo QR codes by retailers, and could see further acceptance via Venmo business profiles and Zettle, PayPal’s point of sale system.


The first signal to Venmo attempting to copy Alipay’s and WeChat Pay’s success of QR codes was after seeing the simple similarities of the Venmo business profile QR code kit to Alipay and WeChat Pay QR code stands. It could be due to there not being many possible variations of QR codes stands. However, I mention this small comparison, as it was what triggered me realizing the success in other countries.

Cardlytics ($CDLX): Best Case Scenario with Venmo

Additionally, use of QR codes lead to significant cost benefits (discussed in the quote below as well as in the next section), incentivizing use.

“In China, payment apps such as WeChat Pay and Alipay use QR codes. A reported 98 percent of urban Chinese consumers use their digital wallet for daily purchases. Most consumers do not carry cash.
The result is that Chinese merchants are not burdened by expensive registers and point-of-sale equipment. Merchants simply display QR codes for customers to scan.
North American brick-and-mortar merchants could reduce equipment costs by implementing QR code-initiated payments, such as from PayPal and Square.”2

Given current adoption and utilization of QR codes in the US is very low in comparison to other countries, there is a long runway for Venmo, and the opportunity for Dosh / Cardlytics.


QR Codes at Restaurants

In the US, we have seen a significant increase in QR codes to view the menu during Covid. However, it is extremely rare to see the full transaction take place from the use of a QR code. If this is possible, it is then more likely that Venmo could adopt this, increasing the usage of Venmo for payments.


By having the entire transaction within the Venmo app, prompted from the use of QR codes, it would provide benefits to both the customer and restaurant, and bring more transaction to Venmo, and increase the number of offers served and number of offers redeemed for Cardlytics (increasing revenue).


Given the high use of QR codes with Alipay and WeChat Pay, I was curious if either had implemented the ability to use QR codes for use in restaurants, to view the menu, place an order, and checkout.


Based on Alipay's website3, it looks like they have created this feature and system. This at least shows it should be possible for Venmo to do the same, and that there is a desire for this feature. Capabilities listed by Alipay include:

  • Scanning the code

  • Viewing the menu and selecting dishes

  • Placing an order

  • Checking out and Paying

Cardlytics ($CDLX): Best Case Scenario with Venmo


Benefits to Customers

The reason a customer would want to use this, over traditional ordering and payment methods such as debit and credit cards, is to enhance the experience. By having everything handled via the QR code:

  • No waiting for a waiter to give you the menu

  • No waiting to place an order or an additional order / refill on your drink

  • No waiting to get the bill

  • No waiting for them to take your bill and give it back to sign

  • Less room for errors on orders, and forgetting to place additional orders, given it becomes digital.

I fully recognize this would not be used everywhere, such as a nicer restaurant, but would be very practical for a large subset of the restaurants. This QR code based experience put this control of timing in the hands of the customer. Also, if a large majority of restaurants implemented, and nicer restaurants did not, it would only enhance the latter’s experience.


Benefits to Restaurants

The number one reason restaurants would use this is to save money and increase table turnover to increase revenue. By removing the “waiting” of the customer, it increases table turnover, and increasing the number of customers served in a given day, increasing revenue. Alipay lists the benefits of using this QR code system for restaurants:


Cardlytics ($CDLX): Best Case Scenario with Venmo

Cardlytics ($CDLX): Best Case Scenario with Venmo


Opportunity

It is possible Venmo will miss this opportunity, or not develop the ability to add their QR codes to those tables, be the sole QR code, and have functionality to pull up the menu, place an order, and pay. If Venmo is able to do so, usage of Venmo to pay would increase significantly. This would be good for Cardlytics, as increase in payments via Venmo increases likelihood of more purchases where there is a Venmo Offer, increasing revenue of Cardlytics.


In addition, if ordering could occur within Venmo, I wonder if SKU level Venmo / Cardlytics offers and redemption would not require Bridg (or other integration) with each restaurant in order to work. This could be possible since Venmo would see each item within a total order when the order was placed in the Venmo app. If this would work, we could see more restaurants (and retailers) using SKU level offers, since there would be less frictions or costs to have this feature if it doesn’t require Bridg.


However, it may be that restaurants will use their own QR code, bring them to their website (as opposed to within the Venmo app), where they can see the menu, order, and pay. Under this process, I am not sure Venmo would benefit remotely as well as they could if it was all within the Venmo app


QR Code Adoption by Retailers


Previous Adopters

We have already seen the adoption of payments with Venmo QR codes by CVS. Previously, they were the only QR code offer on Venmo.


Cardlytics ($CDLX): Best Case Scenario with Venmo


New Adopters

In the last few weeks, we have seen new QR code offers. Both Foot Locker and Giant Eagle have begun advertising offers. The following are QR code offers within the Venmo app.

Cardlytics ($CDLX): Best Case Scenario with Venmo


Opportunity

As discussed in the previous write-up, Venmo is positioned well to add many SMBs, including small retailers, since many already use Venmo to accept payments, especially within the service business. As SMBs switch to business profiles, we could see further usage of QR codes by these retailers. This could lead to many offers placed by SMBs on Venmo as advertisements, and more redemptions of offers, both of which would increase revenue for Cardlytics. Full benefit would come from a self service platform within the Venmo app (similar to all social media apps).


Where we may see further adoption is through Zettle4, a point of sales system acquired by PayPal. Zettle can accept both PayPal and Venmo QR payments. Retailers may be incentivized by this option due lower transaction costs when the payment is PayPal or Venmo. Zettle may lead to a larger number of retailers utilizing and having the ability to accept Venmo, if it does not require integrating with the current point of sale systems, leading to less friction for adding the ability to accept QR code payments.


Simply, if more retailers accept Venmo QR codes for a payment option, all current Venmo users would be able to user their current Venmo account, with their current balance and existing linked cards / bank accounts, at all of those retailers. It does not guarantee they will pay with the QR codes, but it would increase the probability of a Venmo payment being made, since it would at least be possible. Although this payment method is not guaranteed, the current Venmo QR code retailers are using the Venmo offers to incentivize this payment type, based on the fact their current QR code offers are only for QR code payments, and not the Venmo debit card.


Venmo Checkout Button

Venmo had a recent update, where Venmo users can now use their Venmo account to make a payment, almost anywhere PayPal is accepted. By connecting the Safari browser on Apple iPhones to Venmo, users can checkout with Venmo, instead of only PayPal.


This opens the door for a significantly larger percentage of transactions to come from Venmo. The benefit to Cardlytics: more Venmo transactions = higher probability of a transactions where this is an Cardlytics / Dosh offer (increasing their revenue).


Cardlytics ($CDLX): Best Case Scenario with Venmo

This feature should decrease the friction of paying with Venmo. In addition, I would assume this significantly increases the number of stores where you can pay via Venmo. By being a function of the existing PayPal payment system, there is low friction to adding all the stores / retailers to accept Venmo.


I use PayPal to checkout quite often online. I’m not sure I would think to switch to using Venmo instead, unless that became the default option over PayPal (not sure that is very probable). However, younger users without a PayPal account, but with Venmo, would likely use Venmo for quick purchases.


We could see further usage of Venmo at checkout if it showed the Venmo balance. Users may be more likely to pay with Venmo over other options if they may want to make use of that balance. To some, it may seem like “free money”, or simply of a function of availability misweighing bias.


Therefore, Cardlytics/ Dosh may see a significant benefit from Venmo’s update of allowing payments online via Venmo almost anywhere PayPal is available.


Closing

All of this is very early. I enjoy researching and thinking through how this could develop for Venmo, and its impact on Cardlytics, and I will continue watching and post more in the future.


In addition, I have started thinking through, and writing down my thoughts regarding the opportunity with PayPal. I had plans to include it in this write-up, but did not want to make this too long. I hope to post something soon, such as next week.


Follow-Up

If you have any questions or push back on any of the above, please contact me. I would enjoy discussing more.


-Austin Swanson (Swany407)


Twitter: @Swany407


Website: Swany407.com


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More Detail

For a video on this topic, with some different discussions, see here:




Investor Day Presentation (Includes discussions on Venmo)

I discussed Venmo Offers in detail in the Cardlytics investor day write-up and video:



Venmo Offers Valuation

I discussed Venmo Offers and these valuations with additional detail in the following video:




Detailed Write-Up and Valuation

If you are looking for more detail on this company and the investment thesis, I have created a write-up, which is free to read via Substack. The write-up is formatted in bullets to more quickly skim and read sections of interest.

I also discussed the investment on YouTube.



Additional Resources and Links


Sources


Disclaimer: This content is intended for informational purposes. Before making any investment, you should do your own analysis. Please see the Disclaimer page for more details.

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