Venmo is disrupting the person-to-person payment space. According to recent reports, Venmo continues to dominate. In the second quarter of this year its customers did $8 billion in transaction, a 103% annual growth rate and its 16th straight quarter of triple-digit growth. Competitors are getting lost in the dust.
P2P payment is an ever-growing industry. According to a survey by Finder.com, approximately 10.6 million Americans are using digital wallets (including Venmo) to transfer money. “That rise is being driven predominantly by millennials, with 64% having embraced the technology in the past year (half doing so regularly),” says Jennifer McDermott, consumer advocate at personal finance website, Finder.com.
How it works
If you don’t know about Venmo, whose parent company is PayPal, it allows you to pay other people using your phone.
It also has a social media aspect, like Facebook or Instagram that allows you to share with friends who you are paying. “Many people — especially millennials — like the app’s connection to Facebook. But the app’s social sharing is also a cause for concern, since many users don’t fix social media settings to keep account and payments private, thereby broadcasting their use of the app,” points out Linda Sherry, executive director, national priorities for Consumer Action.
You can keep the money in your Venmo account or cash it out.
What’s got everybody so excited?
“Venmo is an easier and quicker way to make payments you historically would have made with cash or checks – everything from paying rent, splitting a dinner check or even sending money to a friend without having to mail a check,” says Tony DeSanctis, senior director and payments expert at Cornerstone Advisors, a consulting firm providing advisory services to banks and credit unions.
It’s about immediacy. “When transferring money from bank to bank, if the accounts are not with the same provider it can take days for funds to clear. Venmo creates an immediacy with funds showing up as soon as the transfer has been made,” says McDermott.
She says another perk is that you avoid awkward scenarios. “Venmo has been attributed with changing conversations around money. Situations such as asking friends for monies owed have had the sting somewhat removed thanks to the simple ‘charge’ function Venmo offers, not to mention the fun emojis to accompany requests. The public nature of the app is also likely to spur people into action sooner than it might have taken them otherwise to transfer money.”
Popular, but not perfect
Like with everything, there are some issues and challenges with Venmo. For one thing, “It is a limited tool that currently only allows payments from one individual to another. It does not allow payments to companies or other merchants. In the past Venmo has had issues with fraudulent transactions but they have enhanced their tools to minimize this risk. There are other apps that do similar things, including Square Cash and Zelle, which is owned by the top large banks in the US. The biggest issue is that there’s no business model here. The strategy is about ‘engagement’ with the hope of getting Venmo users to use other PayPal services that actually generate revenue. The problem with that approach is that most companies are loathe to continually fund the enhancement of a product or service that doesn’t generate revenue,” points out DeSanctis.
Linda Sherry, brings up another concern. “While sending money using the existing balance, bank account or debit card is free with Venmo, linking Venmo to a credit card, which is the safest route, will cost you. There’s a 3% fee for payments made by credit card.”
Sherry is generally not a fan of any payment applications that are linked directly to consumer’s bank accounts. “While consumers have protection against unauthorized use, when the money has come from a bank account, they have to report the loss quickly (within 2 business days) not to be held liable for more than $50 in losses. If they wait longer, their losses could be greater. It’s important that Venmo implement an alert system so consumers will know when changes are made to their accounts.”
Furthermore, she adds, that because you can pay (or charge) friends who have the app, there has been debate about services that let people split checks at restaurants and for party supplies. “I’ve read about people being billed for half of something they didn’t expect. Another more generalized concern is that it can harm relationships because it gives people an excuse to penny-pinch and encourages people to ask for every penny as opposed to splitting the cost of a meal 50-50. In other words, it encourages cheapskates and petty behavior. Of course, others like the ability to pay only for what they order and no extra when sharing a meal.”
There’s another limitation. Says McDermott, “Venmo restricts you to only sending money to those also in the US. To continue to evolve in the future, Venmo would need to put into place an international payment strategy to take advantage of the high demand of those sending money across borders. Americans sent $25.68 billion to Mexico alone in 2015. If other payment apps begin to expand into the foreign money transfer space, Venmo may be left behind.”
What are some other threats or challenges for Venmo?
While the market for Venmo should remain strong, the biggest risk to Venmo is tools and platforms that are even easier to use than Venmo. Apple has recently announced the ability to make P2P payments right in the iMessenger app. Facebook has launched a similar tool in its messenger app. “This means there is no need to go to a separate app like Venmo to make a payment. In addition to new entrants like Zelle, Apple and others, the development of use case specific P2P apps (e.g., alimony/child support, person to person loans, etc.) will cannibalize Venmo’s growth,” says DeSanctis.
Security is top-of-mind. “When there are new money transfer systems, people are bound to be worried about the safety of it. Venmo, as it turns out, has a lesser security rating than other apps of its kind, like Square Cash or Google Wallet. Venmo is only considered ‘PCI compliant’ by the Payment Card Industry Security Standards Council, while other apps have earned higher ratings,” says McDermott.
Sherry goes a step further, “The stock market seems to love Venmo. But unless consumers are completely sure it’s safe, they won’t stick with it. As with all technology, something better might come along.”
The outlook for Venmo is positive
Given the volume and growth of Venmo, as well as the financial backing of a company like PayPal, Venmo will be one of the platforms that likely survives as a viable person to person payment platforms, says DeSanctis. “Their biggest impact will be to disrupt cash and check transactions. If they chose to allow merchant payments, they could have an impact on debit and credit cards.”
Venmo’s potential is huge. Says Sherry, “As I understand it, the merchant connection is how the company will really start to make money, since it’s basically free to users who are not linking a credit card.”