Nowadays it is common to hear consumers and especially millennials say, ‘I don’t know what we did before [insert any of the following] Uber, Amazon, and Netflix.’ While these are great questions and each company has disrupted the respective incumbents within the taxi, brick and mortar, and entertainment industries – I would argue that Venmo has leveraged digital technologies in a more valuable and transformative manner by enabling seamless money transfers between individuals. This brings to light two questions ‘what did we do before Venmo?’ and ‘how do they create value today?’
Before jumping to Venmo, we need to first understand the current fintech environment in which it plays. Today, the overall fintech landscape is large and recreating several tenants within the financial sector with key players establishing a presence within a specific vertical of financial services and specializing in a product category. Major fintech verticals include lending, blockchain/cryptocurrency, personal finance, payments/billing, capital markets, wealth management, money transfers.
Within this evolving ecosystem, Venmo has carved out a substantial piece in the peer-to-peer money transfer market through a mobile platform with an elegant interface, digital transfer mechanism, community nature, and quick sign-up process. This marketplace stronghold ultimately attracted an acquisition by PayPal for $800M in 20131.
To understand Venmo’s current success, which stands at 40M active Venmo users and on pace to facilitate an annual payment volume of $100B, we must better understand how individuals could transfer money directly to one another1. Before Venmo, consumers had several options, which each had its own set of frictions, including but not limited to:
- Withdraw cash from an atm
- Write a check
- Wire transfer
- Chase QuickPay (required at least one party to have a Chase debit card)
First, Venmo addresses consumer needs by enabling users to quickly transfer money among parties through a safe and protected platform. Venmo eliminates the friction that existed in this market given the previous inconvenient and cumbersome option. As a result, the product’s key features including instant transfers, quick withdraws, application designed bank and many more make Venmo a marketplace innovator. By following banking lending laws in combination with secured transactions, Venmo has established user trust providing repeat usage and customer growth. As a result, the platform scale and rapid consumer acceptance demonstrate a clear product-market fit – thus creating value for consumers.
In addition, Venmo has leveraged a unique revenue model to capture value through the platform in parallel to the freemium model that most consumers use. Venmo at the core is essentially a banking / peer-to-peer transfer marketplace and as a result has to deal with the classic two-sided platform problem – needing enough active users on the platform finding the product beneficial and encouraging others to join, which in turn enables Venmo to expand. To address this customer adoption hurdle, Venmo decided at inception to launch a freemium model – helping it gain critical mass with both user acceptance and traction. Although the basic service is free to use, Venmo has added additional features that incur a transaction fee. For example, instant transfers to a linked debit card or bank account can be completed in 30 minutes or less, however, a fee of 1% of the transfer value is incurred2. Likewise, Venmo charges businesses a 2.9% fee when consumers use the app to pay3. However, one common misconception is that Venmo invests consumers in application ‘Venmo Balance’ to generate additional revenue which is currently not a revenue stream being pursued.
Overall, Venmo is a digital winner for disrupting the banking industry by establishing a free easy to use peer-to-peer money transfer platform while developing a robust revenue model. As this platform continues to grow it will be able to leverage its financial expertise to offer additional services including expanded B2C payments, credit cards, and recurring payments/billings. Moreover, with strategic geographic expansion in markets like Australia, Europe, and Canada, gaining acceptance as a method of payment accepted by brick and mortar and online vendors, and leveraging the social network will assist Venmo in growing consumer acceptance and use. As a result, Venmo is a digital winner and remains positioned to be a leader within the growing fintech space.
- Rosenbaum, E. (2019). Venmo has digital user base putting heat on Square and banks, but no plan to profit from it. [online] CNBC. Available at: https://www.cnbc.com/2019/04/25/venmo-discloses-huge-digital-user-base-but-no-plan-to-profit-from-it.html.
- The Balance. (2019). Here’s How Venmo Compares to Competitors. [online] Available at: https://www.thebalance.com/how-to-use-venmo-and-how-it-compares-to-competitors-4776387.
- Sraders, A. (2018). How Does Venmo Make Money and Is It Safe?. [online] TheStreet. Available at: https://www.thestreet.com/technology/how-does-venmo-make-money-14763957.