Monetizing Venmo: Who Pays to Pay?
It’s how millennials ask someone to split a bill or divvy up the cost of an Uber ride.
Since inception, Venmo — a peer-to-peer (P2P) payment application created by two former University of Pennsylvania undergraduates — has experienced explosive growth. In the third quarter of 2015 alone, Venmo processed over $2 billion in payments. That’s more than twice the volume that Square Cash — Venmo’s closest competitor — has processed since it launched two years ago.
Potential first-mover advantage aside, what exactly separates Venmo from the ever-increasing number of P2P payment solutions? Most cite the app’s social features, which include a newsfeed of payment activity between friends in your network. This hybrid financial-social experience takes direct aim at millennials and has garnered the company 3+ million users.
The road to monetization
It’s clear that Venmo is growing rapidly and offers a highly differentiated social experience. But how can the leader in P2P payments monetize its user base going forward? Let’s start with a quick comparison.
Credit card issuers charge transaction fees on the order of 1.5%-3%. Given these costs, Venmo steers users away from credit card-sourced funds. In fact, it provides free balance loading from directly linked checking accounts, waiving the ACH transaction fees it incurs in the process. This means Venmo needs to look elsewhere for revenue.
Why not charge users a per-transaction fee to transfer funds between Venmo accounts? Unfortunately for Venmo — but fortunately for its users — it’s not that simple. Take a moment to consider the reach, primary user base, and value proposition of mobile payments. Fifty-five percent of mobile payments users are between the ages of 18 and 34, and they’ve been socialized to engage in small, fee-free money transfers. It would be an uphill battle to convince them to pay for the same service without providing meaningful incremental value.
Which brings us back to our original question: how can Venmo monetize its user base?
In-app solution: Venmo Touch
In 2013, Braintree—Venmo’s former owner and a PayPal subsidiary — released Venmo Touch. It enables iOS developers to build Venmo into third-party applications as a payment mechanism. Similar to PayPal’s One Touch solution, Venmo Touch reduces the friction of entering credit card information into multiple third-party apps (e.g., Uber, Seamless, and Airbnb). Instead, users simply select Venmo at the time of purchase. There’s also the potential to integrate one of Venmo’s core features—payment splitting—directly into a merchant’s checkout flow. Earlier this year, Venmo cleverly integrated its API with Papa John’s Pizza. This drove a better payment experience for consumers, especially those purchasing products meant to be shared by multiple people. This model lays the foundation for Venmo to begin charging merchants for transaction volume.
Point-of-sale solution: Pay with Venmo
Point-of-sale has traditionally been dominated by card issuers and payment networks like Visa and MasterCard. To crack this space, Venmo should consider partnering with its parent company to take on emerging rivals like Apple Pay and Android Pay. To that end, PayPal CEO Dan Schulman announced in late October an upcoming pilot program to test accepting Venmo at in-store PayPal terminals. But this approach comes with all the downsides associated with PayPal’s current solution.
To start, the value of a point-of-sale solution is intrinsically linked to the size of the network that accepts it. PayPal has historically pursued non-NFC solutions, which may be problematic given a trend towards NFC technology. By the end of 2015, nearly 60% of US point-of-sale terminals will be NFC-enabled. Unless PayPal acts quickly to broaden its point-of-sale reach, a Venmo solution will be a lost cause, with consumers gravitating towards competitors with expanding networks — specifically, Apple Pay and Android Pay.
Additionally, Venmo’s point-of-sale user experience will become increasingly viewed as second-rate, given the seamless, fingerprint-enabled payment user experience that automatically displays when an iPhone or Android device is held close to an NFC terminal. To that end, the incremental steps of logging into a phone and launching an application could represent a significant disadvantage for Venmo.
Putting it all together
For both the in-app and point-of-sale solutions, the path to monetization is charging merchants, who, thanks to Visa and MasterCard, have already come to terms with paying transaction fees. From a pricing perspective, PayPal can charge merchants the same rate for Venmo transactions and PayPal transactions, in theory, driving merchant indifference between the two. From PayPal’s perspective, an incremental dollar spent in-store using Venmo would be just as valuable as a dollar spent using PayPal. That value parity should strategically motivate PayPal to aggressively pursue both its in-app and point-of-sale Venmo solutions.
But PayPal needs to ensure that this strategy complements — not undermines — its core products. Consider the demographics of a typical Venmo user: younger and more engaged with mobile technology. PayPal can use Venmo to target segments — such as Millennials — that are less likely to engage with its more traditional payment offerings. It can also cross-sell Venmo solutions to users otherwise unwilling to try new ways to pay. With both strategies, Venmo moves from just a rapidly growing app to a rapidly growing app that also contributes strongly to PayPal’s bottom line.
Thanks to Matthew Applegate and Uday Seth
