Cold hard cash.It used to be king.But in a world where you can pay someone byswiping a few times and clicking a button,consumers are opting to transfer money onlineinstead.They are the two words all millennials seem to beusing these days.Venmo me!One popular option is Venmo.If you haven’t used it yet there’s a good chanceyou will soon.
The peer to peer payment app, owned by PayPal hasbecome a household name.I don’t have Venmo.Katie get Venmo it’s free.The finance app also operates like a socialnetwork and lets you comment on payments seeingwho and what your friends are spending on.It all happens pretty seamlessly from your phone.But on the back end it’s not as simple as usingcash. Some have concerns over data and the factthat it’s not a bank and Wall Street is waitingto see if it can really become a moneymaker forits parent company.It’s a real concern.Venmo isn’t profitable.It is a very strong social network.Personally freaks me out that people know whothey 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 formerUniversity of Pennsylvania students.He was visiting me in New York and didn’t have hiswallet so I covered him for the whole weekend andhe wrote me a check to pay me back and we thoughtthis is silly we should be using our phones to dothis.It was later bought by Braintree for 26 milliondollars.Not billion million.Braintree was later bought by PayPal.Bill Ready CEO of Braintree at the time and nowchief operating officer at PayPal is the manresponsible for bringing the no name app tomainstream fame.The name Venmo comes from the Latin vendere andmobile and sort of bringing those two thingstogether.We really wanted to be the way people would payfor everything.Braintree is platform helped PayPal Dive intoMobile which is now about 40 percent of itsbusiness. Bill had us to PayPal’s New York Cityoffices where Venmo is headquartered.It’s come a long way from where it had been at onetime the early vinyl office literally there were10 people in the office unfinished floors and itwas so crowded that for me to do conference callsI’d go up on the rooftop which was unfinished –like tar roof.Ready has founded five startups and has abackground in software engineering.He bet on mobile payments before banks were inthe palms of our hands.Now you look back at it we did 19 billion dollarsin volume last quarter alone drawing 80 percentplus year on year still so 26 milliondollars now looks like a steal.Back then people thought was crazy to pay that.The app has since evolved into a crown jewel andPayPal’s digital payments empire.For all of 2018, the app processed 62 billiondollars in payments – a 79 percent increase froma year earlier and the company says it’s on trackto reach 100 billion dollars by the end of 2019.Getting users on the platform has been a snowballeffect. One estimate from eMarketer says Venmohas attracted twenty seven point four millionpeople.Each user begets other new users and becomes moreengaged over time.Profitability. What will that take?Venmo’s most now one of the largest mobile apps inthe 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 knowthe growth in the market share that we’recapturing and making sure we have modernizationand line of sight to profitability but notnecessarily trying to get to profits today.We want to make sure we go capture that market.Bottom line Venmo’s still not breaking even and itwon’t be for a while.So part of its appeal is that it’s free which hasattracted a ton millennials.But how do they plan to make money eventually.The company does charge for certain events.If you want to use a credit card instead of adebit card on Venmo it’s a 3 percent fee.And if you want money in your account faster thanthe typical one to two day wait you could pay forthat too.The company also partners with Uber, Chipotle,GrubHub and others and makes money off of thosepartnerships.The primary way that we make money on Venmo isreally by merchants paying us for the acceptanceof them which is the same way that PayPal makesmoney, you know merchants that choose to acceptVenmo you know they pay us a small fee to acceptpayment from a Venmo user.Venmo is not a bank though.Paypal has money transmitter licenses.The money in your account is actually held at apartner bank.It’s a common setup for fintech companies thatdon’t have a bank charter.The tech company handles the front end and it mayappear as though the money is sitting in anaccount on your phone.But it’s really not the partner bank is the oneholding that money.It all means that money you keep onVenmo’s platform is not insured by the federalgovernment – like it would be in a standardchecking 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 financialinstitutions that hold that money for us.Wells Fargo is a major partner for us on that butwe work with a number of them.They’re not paying you interest when you keep yourmoney there.They’re also not lending it out like a bank canbut they’re making a little bit of money.Would you guys ever invest that money?Separate from Venmo if you look across PayPal wewill hold balances in some very safe investmentgrade securities – think government treasuries orthings like that.And so do you earn interest on that I assume?A small amount.Yes.Got it.But that small amount can really add up for acompany holding a boatload of cash, offering abig moneymaking opportunity for Venmo.So how does Venmo actually work?You link your bank account type in someone’snumber the dollar amount and send it but it’s notall that easy.Think of it as a duck going across water.It looks very smooth to the consumer but below istheir feet moving very quickly.You send money to me Kate.It shows up on my Venmo account real time but themoney 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 andmove it into my bank account.Then I have to go into the traditional banksystem we call ACA or the Automated Clearinghouseand that’s when all the friction happens.Just like our roads and bridges are broken ourpayment infrastructure is old and broken.All the transactions are batched up sent to theFederal Reserve and it’s sent overnight to yourbank.And so it’s very inefficient and it really showsup the next day between the banks.Venmo is hardly the only game in town for digitalpayments. Square’s popular peer to peer cash apphas similar features and according to one reportis growing even faster than Venmo.The Square Cash app downloads have actuallyexceeded venomous every month that passes by thegap between the two keeps widening.So literally Square Cash adds about 2 millionusers every month which is amazing.If you go on Google Trends and type Square Cashwhat you’ll see which I thought was striking isalong the southeast that’s where most people havesearch for Square Cash.You don’t see that as much in the Northeast andsort of the Pacific West.And the interesting thing there is it turns outthat is a socioeconomic thing to this Square Cashapp. It’s become sort of the go to app for theunder banked whereas Venmo is still being used alot but is a different socioeconomic group ofpeople I’d say like a cliché is like Millennials.Got it.It’s sort of the coastal millennials are usingVenmo?Pampered millennials versus hard working underbanked. So I mean so I’m exaggerating but that’ssort of like the way it turned out.But Bill Ready insists Venmo is also going afterthe under banked this aspect of finding ways toget the underserved while that’s on the consumerside. Merchant side into the digital economyextremely important not just for us but I thinkto 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 andZelle is a little bit different than Venmo.There’s no middleman so it’s directly integratedwith the banks.There is more security around it because there’smore compliance because the regulators look atthat and look at those transactions and ensurethat you’re doing it a proper way.According to a Wall Street Journal report Venmowas hit by a wave of payment frauds in 2013 thathelped push losses higher than the companypreviously expected.They recorded an operating loss of about 40million dollars nearly 40 percent higher than theloss for which the company had budgeted.In a statement to CNBC PayPal said Venmo losslevels are lower than the overall average forPayPal and compare favorably to the industry whenintroducing new features it is not unusual to seeshort periods of elevated losses Reddy saidpreventing fraud is one reason they collect datawhich has gotten other tech companies likeFacebook into hot water.To be very clear we’re not in the business ofselling people’s data.We don’t engage in that.We leverage things about the device and thosetypes of things for fraud protection purposes.In terms of the user’s information being sharedthe user is in full control of what they share.Financial technology or fintech has a higher barfor regulation Venmo has run into issues with theFTC but it settled.The industry watchdog accused Venmo of misleadingcustomers when it came to privacy disclosures andsome information being automatically displayed onVenmo social news feed.The FTC also alleged that Venmo misrepresented theextent to which consumers financial accounts wereprotected by quote bank grade security systems.We have been a pioneer in the space when you’redoing things that have never been done beforeyou’re trying to make sure you do the best thatyou can to to work with regulation that existsbut sometimes that regulation may not speak tonew things that have not been done before and theFTC settlement much of it was addressing thingsthat we had already addressed.But we have absolutely made sure to implement allthe recommendations.We always work very closely with regulators.We really take an approach that we have a commoninterest with regulators.Venmo has had to comply with internationalsanctions and law enforcement which can be trickywhen people are communicating with emojis.So how do you distinguish what’s a joke andwhat’s really a threat.So we actually from regulators get a list ofkeywords and if people use those keywords ornames that might be on a terrorist watch list anyof those kinds of things we are obligated to gointervene and report those.Now what we’re able to do in those is give theuser a way to go explain what it was like OK youweren’t buying goods from Cuba you’re buying aCuban sandwich.Are there certain emojis that would trigger awarning from Venmo.We don’t have a list of embargoed emojis just yetbut maybe that’s coming in the future.So Venmo has revolutionized the way we think aboutcash. But Wall Street is still watching to seewhether or not it can really become profitablefor its parent company PayPal.Like any fintech company there are plenty ofchallenges. 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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