What Is Venmo and How Can I Use It?

„Cash is king“, „There is never enough cash“. This used to be true and still is in some countries at least to a certain extent. But the world has changed and consumers are driving this change. One can pay for almost anything by swiping a card or clicking a button, and most importantly payments are moving online. Especially in the US you might have heard “Venmo me!”. Venmo is taking the peer to peer payments market by storm and if you haven’t used it yet it’s sheer abundance gives me the impression that you will soon. It managed to become industry leader for convenience in only a few years and has a younger brand than big players such as PayPal (ironically Venmo is owned by PayPal). The best thing about Venmo, it’s free! The app also adopted traits of social networks and allows you to comment on payments and see what your friends are spending money on. And it does all that in a sleek design and without effort directly from your phone. 

Now you might think, what actually happens under the hood and who is using all the data? FYI it’s a real concern. It has a very strong social network and it might freak some people out that others know who they paid and who paid me. The majority of the millennial customer base does not seem to care too much. Venmo is not a bank, it does not generate a profit from it’s operations yet and investors are waiting to see if it can really become a profitable for its parent company. To understand Venmo let’s take a look at the history. It was founded in 2009 by two former University of Pennsylvania students who were trying to solve the painful experience of paying back friends who covered for them for example on a trip together. Instead of writing a check, this should be done using a smartphone. The start-up ws bought by Braintree for 26 million USD. And Braintree was subsequently bought by PayPal. The name Venmocomes from the Latin vendere for selling and mobile which basically says it all. The platform of Braintree helped PayPal dive deeper into mobile which is now about 40 percent of its business. 

Venmo has come a long way and it was betting on mobile payments before banks knew how to spell digital or customer experience. Taking a look at the company nowit processed 19 billion dollars in volume in Q1 2019 alone which represents a plus of 80 percent year on year. That makes the 26 million dollar deal look like a bargain. The app has since evolved into a bright star in PayPal’s digital payments empire. For all of 2018, the app processed 62 billion USD in payments – again an almost 80 percent increase from the previous year with the 100 billion dollar line to be crossed by the end of 2019. Acquisition of new users on the platform has also been a straight line up. One estimate says Venmo has attracted 27.4 million people in the US. Each user convinces other new users and becomes more engaged over time.

What about profitability though?

Venmo is now one of the largest mobile payment apps in the world and among the leaders in the American market. The focus has been on growth of market share and keeping up with modernization and not necessarily trying to get to profits today. So Venmo is still not breaking even and it won’t be for a while. But how do they plan to make money eventually? The company does charge for certain events. Also if you want to use a credit card instead of a debit card on Venmo there is a 3% fee. And if you want money in your account faster than the typical 1-2 day period you could pay for that, too. The company also partners with Uber, Chipotle, GrubHub and others which is actually the primary way that Venmo makes money. The idea is that merchants pay for the acceptance of Venmo which is the same way that PayPal makes money. Merchants that choose to accept Venmo know they pay a small fee to accept payments from a large, young and increasingly wealthy customer segment. 

But Venmo is not a bank, PayPal on the other hand has licenses to transmit money. The money in your Venmo account is actually held at a partner bank, which is a common setup for Fintech companies that don’t have a bank charter. The tech company handles the front end and it may appear as though the money is sitting in an account on your phone to make things look easier. But it actually is the partner bank that is processing your money behind the scenes. It also means that money you keep on Venmo’s platform is not insured by the federal government – like it would be in a standard checking or savings account. Venmo is not the (retail-)banking business and is not trying to be. They’re not paying you interest when you keep your money there. They’re also not lending it out like a bank can but they’re making a little bit of money. PayPal for example holds balances in some investment grade securities considered very safe- like government treasuries and earns some money from that. And the more money you hold the more profits you can keep which represents a great opportunity for Venmo. 

But how does Venmo actually work? You link your bank account, type in someone’s phone number, the USD amount and send it right? But it’s not all that easy. Think of it as a duck going across water. It looks very smooth to the consumer but below is their feet moving very quickly. You send money to your friend and it shows up on his Venmo account in real time but the money is really not in bank account (yet). Your friend could not go spend it or go to the ATM and use it. Until then the money has to go into the traditional bank system (ACA or the Automated Clearinghouse) and that’s when all the friction happens. Just like our roads and bridges are broken, our payment infrastructure is old and broken. All the transactions are batched up, sent to the Federal Reserve and it is sent overnight to your bank. So it’s very inefficient and it really only shows up the next day between the banks. Venmo is hardly the only game in town for digital payments. Square’s popular peer to peer cash app has similar features, starts to support crypto and according to one report is growing even faster than Venmo. The Square Cash app downloads have actually exceeded Venmo’s and every month that passes by the gap between the two keeps widening. So literally Square Cash adds about 2 million users every month (which equals the population of Nebraska). If you check Google Trends for Square Cash you’ll notice that along the Southeast is where most people search for Square Cash. You don’t see it as much in the Northeast and parts of the Pacific West. It turns out that interestingly this is a socioeconomic factor around the Square Cash app. It has become the go to app for the underbanked whereas Venmo is still being used a lot but it is a different socioeconomic group of people (urban and coastal Millennials). 

Banks are also getting into the P2P payment game. The big banks JP Morgan, Bank of America, Citi, Wells Fargo and others launched Zellein 2017 and it differs from Venmo. There’s no middleman so it’s directly integrated with the banks. There is more security around it because there’s more compliance in the relatively highly regulated banking sector. According to a Wall Street Journal report, Venmo was hit by a wave of payment frauds in 2013 that helped push losses higher than the company previously expected. They recorded an operating loss of about 40 million USD (nearly 40 percent higher than budgeted). In a statement to CNBC, PayPal said Venmo loss levels are lower than the overall average for PayPal and compare favorably to the industry. When introducing new features it is not unusual to see short periods of elevated losses and preventing fraud is one reason why they collect data which is seen more critical today than it was when companies like Facebook were still smaller. Venmo says they are not selling data and they only leverage things about the device and other things for fraud protection purposes. In terms of the user’s information being shared, the user is in full control of what they share. Fintech has a higher bar for regulation and Venmo has run into issues with the FTC but it settled.

The industry watchdog accused Venmo of misleading customers when it came to privacy disclosures and some information being automatically displayed on Venmo’s social news feed. The FTC also alleged that Venmo misrepresented the extent to which consumers financial accounts were protected by quote bank grade security systems. Still, Venmo has revolutionized the way we think about cash. But Wall Street is still watching to see whether or not it can really become profitable for its parent company PayPal. Like any Fintech company there are plenty of challenges. The bar for regulation is very high. There are data and privacy concerns. And of course they’ve got tons and tons of competition.

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