One popular option is Venmo. If you haven’t used it yet there’s a good chance you will soon. I don’t have Venmo. You can get Venmo. It’s free. It all happens pretty seamlessly from your phone. But on the back end, it’s not as simple as using cash. Some have concerns over data and the fact that it’s not a bank, and Wall Street is waiting to see if it can become a moneymaker for its parent company.
It’s a real concern. Venmo isn’t profitable. It is a powerful social network. Personally freaks me out that people know who they paid and who paid me. But I guess millennials like that. Let’s take it back to where this all started. Venmo was founded a decade ago by two former University of Pennsylvania students. He was visiting me in New York and didn’t have his wallet, so I covered him for the whole weekend, and he wrote me a check to pay me back, and we thought this is silly we should be using our phones to do this. It was later bought by Braintree for 26 million dollars. Not a billion million. PayPal then bought Braintree. Bill Ready, CEO of Braintree at the time and now a chief operating officer at PayPal, is the man responsible for bringing the no-name app to mainstream fame. The name Venmo comes from the Latin vendere and mobile and bringing those two things together.
How Venmo Makes Money
We wanted to be the way people would pay for everything. Braintree is platform helped PayPal Dive into Mobile, which is now about 40 percent of its business. Bill had us to PayPal’s New York City offices where Venmo is headquartered. It’s come a long way from where it had been at one time the new vinyl office there were 10 people in the office unfinished floors, and it was so crowded that for me to do conference calls I’d go up on the rooftop which was unfinished — like tar roof. Ready has founded five startups and has a background in software engineering. He bet on mobile payments before banks were in the palms of our hands. Now you look back at it, we did 19 billion dollars in volume last quarter alone, drawing 80 percent plus year on year still so 26 million dollars now looks like a steal.
Jewel and PayPal’s digital payments empire
Back then, people thought it was crazy to pay that. The app has since evolved into a crown jewel and PayPal’s digital payments empire. For all of 2018, the app processed 62 billion dollars in payments – a 79 percent increase from a year earlier, and the company says it’s on track to reach 100 billion dollars by the end of 2019. Getting users on the platform has been a snowball effect. One estimate from eMarketer says Venmo has attracted twenty-seven point four million people. Each user begets other new users and becomes more engaged over time. Profitability. What will that take? Venmo’s most now one of the largest mobile apps in the world by dollar volume, I think in the U.S., you’d put his top two or top three. And so you know we’re really focused on you know the growth in the market share that we’re capturing and making sure we have modernization and line of sight to profitability but not necessarily trying to get to profits today.
We want to make sure we capture that market. Bottom line Venmo’s still not breaking even, and it won’t be for a while. So part of its appeal is that it’s free, which has attracted a ton millennials. But how do they plan to make money eventually? The company does charge for specific events. If you want to use a credit card instead of a debit card on Venmo, it’s a 3 percent fee. And if you wish to money in your account faster than the typical one to two day wait you could pay for that too. The company also partners with Uber, Chipotle, GrubHub, and others and makes money off of those partnerships. The primary way that we make money on Venmo is really by merchants paying us for the acceptance of them, which is the same way that PayPal makes money, you know merchants that choose to accept Venmo you know they pay us a small fee to accept payment from a Venmo user.
Venmo is not a bank, though. Paypal has money transmitter licenses. The money in your account is held at a partner bank. It’s 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. But it’s really not the partner bank is the one holding that money. It all means that payment you keep on Venmo’s platform is not insured by the federal government – like it would be in a standard checking or savings account. I mean no aspirations at all to become a bank. It’s not the business that we’re in. We’re partnering with major financial institutions that hold that money for us. Wells Fargo is a major partner for us on that, but we work with a number of them.
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.
It looks very smooth to the consumer, but below is their feet moving very quickly. You send money to me Kate. It shows up on my Venmo account real time but the money is really not my bank account. Could I go spend it. No. Can I go to the A.T.M. and use it. No. So how Venmo works if I wanted to get it and move it into my bank account. Then I have to go into the traditional bank system we call 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’s sent overnight to your bank. And so it’s very inefficient and it really 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 and according to one report is growing even faster than Venmo. The Square Cash app downloads have actually exceeded venomous every month that passes by the gap between the two keeps widening.
Google Trends and type Square Cash
So literally Square Cash adds about 2 million users every month which is amazing. If you go on Google Trends and type Square Cash what you’ll see which I thought was striking is along the southeast that’s where most people have search for Square Cash. You don’t see that as much in the Northeast and sort of the Pacific West. And the interesting thing there is it turns out that is a socioeconomic thing to this Square Cash app. It’s become sort of the go to app for the under banked whereas Venmo is still being used a lot but is a different socioeconomic group of people I’d say like a cliché is like Millennials.
Got it. It’s sort of the coastal millennials are using Venmo? Pampered millennials versus hard working under banked. So I mean so I’m exaggerating, but that’s sort of like the way it turned out. Bill Ready insists Venmo is also going after the under banked this aspect of finding ways to get the underserved while that’s on the consumer side. Merchant side into the digital economy extremely important not just for us but I think to the health of the economy. Banks are also getting into that P2P payment game. The big banks JP Morgan, Bank of America, Citi, Wells Fargo and others launched Zelle in 2017 and Zelle is a little bit different than Venmo. There’s no middleman so it’s directly integrated with the banks. There is more security around it because there’s more compliance because the regulators look at that and look at those transactions and ensure that you’re doing it a proper way.
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 dollars nearly 40 percent higher than the loss for which the company had 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 Reddy said preventing fraud is one reason they collect data which has gotten other tech companies like Facebook into hot water.
To be very clear we’re not in the business of selling people’s data. We don’t engage in that. We leverage things about the device and those types of things for fraud protection purposes. In terms of the user’s information being shared the user is in full control of what they share. Financial technology or fintech has a higher bar for regulation 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 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.
We have been a pioneer in the space when you’re doing things that have never been done before you’re trying to make sure you do the best that you can to to work with regulation that exists but sometimes that regulation may not speak to new things that have not been done before and the FTC settlement much of it was addressing things that we had already addressed. But we have absolutely made sure to implement all the recommendations. We always work very closely with regulators. We really take an approach that we have a common interest with regulators. Venmo has had to comply with international sanctions and law enforcement which can be tricky when people are communicating with emojis. So how do you distinguish what’s a joke and what’s really a threat. So we actually from regulators get a list of keywords and if people use those keywords or names that might be on a terrorist watch list any of those kinds of things we are obligated to go intervene and report those. Now what we’re able to do in those is give the user a way to go explain what it was like OK you weren’t buying goods from Cuba you’re buying a Cuban sandwich.
Are there certain emojis that would trigger a warning from Venmo. We don’t have a list of embargoed emojis just yet but maybe that’s coming in the future. So 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.