Venmo is a bit of a paradox: it was able to grow via direct network effects, but its trajectory has seemingly stalled because it has been unable to tap into indirect network effects that everyone assumed it would be aiming for.
Venmo, which was acquired by Braintree in August 2012 for $26 million, is at its core a peer-to-peer money transfer app. It provided massive convenience for users in at least two major ways. First, it provided a new money account for users, one which was more liquid than a checking account and less cumbersome than cash or credit cards with respect to peer-to-peer money transferring. Second, it created a great and convenient mobile experience just as mobile usage, especially in its target demographic of college students and young adults, was taking off. These were key pillars of their value creation proposition.
Perhaps the biggest source of value creation, however, was in the direct network effects: Venmo is an easy way of transferring money between you and your friends, but only if everyone has a Venmo account. To grow its user base, Venmo had a number of strategies, such as including a social element where your Venmo account would paste to your Facebook wall when you made a transfer, or a $1 referral bonus for getting one of your friends to sign up. What was perhaps most compelling, however, was the word-of-mouth. Every expense-splitting moment (e.g. at the end of a restaurant meal, every month when splitting rent, etc.), some millennials began asking “Do you use Venmo?”, and if the unfortunate friend answered negatively, there probably was a conversation extolling the convenience of the product.
The more users which were on Venmo, the more convenient it became for all Venmo users, as it became a solution to the need to transfer money between friends more and more often. From this value creation, Venmo has to date not captured too much of the value – it makes money mostly off of charging fees for users who connect their Venmo balance to a credit card (connecting it to a bank account or debit card, however, is free). Venmo seems to have consciously decided not to charge more for its popular product, probably to keep the barriers to adoption minimal.
It was also probably hoping to be able to monetize via a different channel: charging a percentage off of business-to-consumer transactions. Herein lies a paradox of Venmo’s growth: despite having a large and growing user base, it has surprisingly been unable to get businesses to sign on as partners and use Venmo as a payment method.
At first glance this is somewhat surprising, as one might expect strong indirect network effects: the more users who use Venmo, the more businesses are likely to want to offer the feature of allowing payment via Venmo. This would especially be true if Venmo charged fees lower than credit card companies.
However, Venmo has been unable to grow its business user base. Perhaps it is unable to charge lower fees than credit cards because it doesn’t have the same scale as credit card processors. Or, perhaps users aren’t clamoring for “pay by Venmo” because they are already accustomed to use credit and debit cards. Or, perhaps “pay by Venmo” doesn’t integrate well with businesses’ existing POS systems. Whatever the reason, being unable to crack the B2C payment link bodes poorly for Venmo’s future impact, which is probably why they sold themselves relatively early.
And this is not for lack of trying: Venmo has tried to make its product more of a platform by offering the Venmo API. Moreover, this API seems relatively full-featured: developers can request or send payments to Venmo users. However, developer adoption of the API seems poor. Venmo has just been unable to crack the payments space, and instead stays firmly rooted in the friend-to-friend money transferring use case.
The direct network effects in the C2C transfer space are undoubtedly strong, and consequently numerous players have tried competing with Venmo. In general, other independent players (e.g. Square, Google) have failed because they have been unable to overcome the gain enough initial momentum to compete with Venmo’s established user base. Banking players (e.g. Bank of America, Chase) have come out with similar products, but they generally only work well between two users who are both members of the same bank, which destroys a key value of the network effects. Thus far, we have seen that direct network effects have made it very difficult to compete head-on with Venmo. One potential way Venmo could be brought down is if someone is able to offer everything Venmo does, plus a new feature that solves another key problem for users – perhaps this could be the B2C payment link. But until that happens, Venmo seems to be stuck in the strange position of having built an amazing product with amazing direct network effects…but maybe not knowing what to do next.