Venmo is one of the many fin-tech start ups that have changed the way people spend money. It is a popular peer to peer money transfer system that allows users to quickly and conveniently transfer money to other users on the platform, regardless of any bank affiliations which had previously divided individuals. In contrast, users are able to find peers via username, email, phone number and even Facebook contacts – which has shifted the use case to be much more social than ever before.
While such a tool like Venmo does not completely eliminate the need for a bank, it poses a significant threat to traditional bank and credit card business models. Historically, banks have relied on large, stable low-cost deposits from customers in order to then offer higher yielding loans and other bank products. In addition, credit cards rely on transaction fees as well as late fees from consumers. While Venmo does not necessarily mean the end of these sources of revenue, there is something to be said about the estimated $20bn of payment volume Venmo expects to process this year. As peer to peer money transfer systems take share in transactions, banks and credit cards stand to lose on deposit balances & fees, transaction fees and so on. One countervailing notion to this is that Venmo may be enabling more transactions to happen than ever before. In that case, Venmo could actually be encouraging more spend, eventually leading to more fees, deposits or earnings down the line. As the array of mobile financial products increases, it remains to be seen what the true net effect of all of this will be. However, I am of the notion that Venmo and other technologies will continue to take share from traditional banks to such a degree that they will likely be made worse off, as cash becomes distributed amongst a wider array of financial services.
Venmo can deliver to consumers in a way traditional banks cannot due to several differences in their operating model. First, Venmo eliminates historical barriers that have come from bank to bank transactions. For example, it was typically the case that a Bank of America customer could not easily find and transact with a Chase customer. Sensitive information such as routing numbers would need to be collected and exchanged each time a transaction was done, and information on how or where to do this was not straightforward. Secondly, its mobile application allows for much greater convenience in comparison to transactions typically done by check, computer or bank branch. By eliminating these barriers and making a truly convenient way to lend with peers, Venmo has allowed for smaller, more frequent transactions among a much more expansive network of people. Also unlike its competitors, Venmo has become as much a social app as a financial tool, leading to much higher consumer engagement and use. As Venmo’s popularity grows, it will become increasingly difficult for new entrants to compete with Venmo’s network.
Going forward, I believe Venmo should be fully focused on increasing its user base. It has become clear that the network effects of a payment app can be particularly strong given the difficulties and inconveniences associated with frequently transferring sensitive bank information. The expanded network will not only have compounding effects on the convenience of the app, but will create a compelling and sustainable competitive advantage. In addition, as Venmo continues to take share of wallet, the data it collects around customer transactions will become increasingly valuable.
Building off of Venmo’s customer promise on convenience and ability to eliminate cash transactions, I believe an interesting area of growth could be in foreign exchange, particularly in the backdrop of increased globalization. As much as credit cards have allowed customers to avoid foreign transaction fees while traveling internationally, there will always be vendors and individuals around the world who will have a preference for cash. Given Venmo has eliminated historical divisions due to bank affiliations, perhaps it can also serve as an intermediary for those looking to exchange currencies across countries and allow individuals to transact at low-to no transaction fees. As an example, if Harry wants $11 to buy a T-shirt in New York, but has €10 in his European bank account, and separately Amanda is wanting to purchase a €10 hat in Paris but only has a US dollar denominated bank account, Venmo could conceivably transfer Harry’s euros to the Parisian hat store while Amanda’s dollars are transferred to the T-shirt shop in New York. Assuming all parties associated with this transaction used Venmo and there was a critical mass of participants around the world, such a matching process may not be too far out of reach. (779 words)