On the surface, the Uber-Venmo partnership sounds like a coup for Venmo, getting its brand into the app that defined the ride-sharing category. But the partnership is a much bigger deal for Uber, which is quietly competing against the payment option that new riders are most likely to select.

The Venmo news follows last year's addition of a Barclays credit card that Uber riders can apply for and manage within the Uber app. These two payment options serve very different markets — with Venmo a staple of millennials — but from Uber's perspective, they are both far better than allowing riders to use the mobile wallet that came built into their phone.

Both Uber and Lyft accept Apple Pay to expand consumer options, but it’s not their first choice because of a lack of data sharing. Apple Pay is also notorious for its fees, creating a scenario where Uber and its rivals are paying more for a payment option that gives them less of what they want.

“We don’t have a direct relationship at that point with that customer who’s signing on using Apple Pay. … All we know is a token, at that point," Ashwin Raj, Lyft’s vice president of payments, said at SourceMedia's PayThink conference in 2017. "That is less preferable.”

By contrast, Venmo is all about the data. The company, a unit of PayPal, can attribute its early success to an interface that mimics a social media feed, complete with emojis. More than 6 million Venmo payments included the word "Uber" in their description over the past year, Venmo said.

Chart: Too young for the card game

In those cases, Venmo users were splitting rides with one another and using the P2P app to repay their friends — Uber didn't see any savings from that usage. If those 6 million riders can start paying Uber directly from their Venmo accounts, they would create a meaningful reduction in credit card interchange expense. Uber declined to provide a breakdown of how its customers pay for their rides, but since many options are credit card based, it’s safe to say the cost could be steep.

The ride-sharing market is hotly competitive. Uber faces direct rivals like Lyft, which just bought the bike-sharing company Motivate; and Grab, which is aggressively diversifying its financial services offerings. All of these companies face pressure from legacy taxi companies and regulators.

Lyft claimed in May that it has 35% of the ride-sharing market, up from 20% 18 months earlier. In a May 2018 CNBC interview, CFO Brian Roberts remarked that “the last 18 months have been a period of incredible, sustained growth for Lyft," and that "there are no signs of that momentum slowing down." If Uber doesn’t take those words to heart, its investors more than likely do.

What about Venmo?
While Uber's cobranded Barclarycard provides significant rewards to existing customers, it does not necessarily address how to attract new customers to the ride-sharing market, particularly ones who don’t have or can’t get a credit card.

The average Vantage score for Gen Y (millennials) was 638 and for Gen Z was 634, according to the Experian 2017 State of Credit report. This puts both demographics below the country average of 675, making it difficult for them to get a credit card. Since these consumers represent an underserved ride-sharing customer segment, they are a clear opportunity for the millennial-savvy Venmo.

Venmo is under pressure to deliver financial results for its parent company PayPal meanwhile it is feeling the competitive pressure from Zelle. In 2017 Venmo processed $35 billion P2P transfers that were free to consumers, yet it was overshadowed by the new bank P2P consortium network Zelle.

Bank of America said in an earnings report last week that Zelle drove $10 billion in payments volume during the quarter ended June 30, up 118% over the same period a year earlier. Total transactions during the period reached 35 million, up 143% year over year.

Those stats are for BofA alone. The Zelle user base at the four largest U.S. banks is about 89 million, according to analysts.

“If the 100% volume growth reported by BofA is an indication of overall volume trends for Zelle, consumer adoption of Zelle could be at an inflection point and pose a threat to PayPal’s Venmo P2P service,” said Thomas McCrohan, an analyst with Mizuho Payments, in a note to investors.

The size of Venmo's partnership with Uber opens the door to potential revenue expectations Venmo may have from this partnership. It also demonstrates a degree of a willingness to achieve scale without piloting something first.

Venmo clearly feels the needs to generate money quickly, and who better to do so with than the leader in the ride-share market? If Venmo’s customers are willing to eschew cars like they do credit cards, this may be a good fit.

Kate Fitzgerald contributed reporting to this story.

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