The Future of Venmo

Venmo is hot. Business Insider reports that quarterly P2P payments volume through Venmo exceeded $2 billion in Q3 2015, three times greater than in Q2 2014. That brings the 2015 YTD total to $5 billion, on track to hit somewhere between $7.5b and $8 billion, up from $2.4 billion in 2014.

And just a year ago, Forrester Research updated its U.S. forecast for mobile P2P payments from $4 billion by 2017 to $5 billion. So much for that forecast.

Why Venmo?

Payments execs at banks must be shaking their heads in disbelief. How long have they been trying to push P2P payment services at their customers to no avail? CashEdge launched PopMoney in December 2010, so let’s go with five years.

Why did Venmo succeed where so many banks–with a ready-made base of customers–failed? Sure, Venmo has a great interface and is easy to use. But to a large extent, Venmo has taken off thanks to the TechCrunch Effect.

I coined the term TechCrunch Effect two years ago writing about Coin (yes, pun intended). I chalked up the early interest and success (if you can call it that) of Coin to the fact that an article in TechCrunch gave the product instant credibility, and, more importantly, a coolness factor. And that’s the real essence of the TechCrunch Effect: A product becomes “cool” among some segment of consumers for whatever reason. In the case of Coin, it was TechCrunch that spurred the cool factor.

I don’t know what made Venmo cool. You’ll have to ask a 25 year old. I’m on the wrong side of the Venmo Line.

How Big is Venmo?

A new report from Aite Group found that 5% of adults used Venmo to make a payment in 2014.

With the 2015 Venmo dollar volume triple the 2014 level, it’s a good bet that the current adoption percentage is higher. It’s possible, of course, that the 2014 users tripled their Venmo transaction or dollar volume in 2015, but I’m not betting that that accounted for all the growth.

So let’s say that the adoption percentage doubled to 10%. There are roughly 250 million adults in the U.S., so that would yield 25 million Venmo users. With 2015 dollar volume of roughly $7.5 billion, on average, Venmo users send $300 per year. PayPal CEO Dan Schulman has said that the the average Venmo user makes 3-4 transactions a week, or 150 to 200 transactions per year. That would make the average Venmo transaction between $1.50 and $2.00.

These numbers don’t jive. In 2011, Aite Group estimated that the total number of P2P transactions (all transactions, not just electronic or digital) in the U.S. was 11 billion. While the methods used to make those payments may have changed dramatically, the number of transactions probably has not. If 25 million Venmo users are making 180 transactions per year (roughly 3.5 per week), then the total number of Venmo transactions is in the 4.5 billion range. AND THAT IS SIMPLY NOT POSSIBLE. There is no way that more than a third of P2P transactions in this country are flowing through Venmo.

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So let’s revisit our assumptions. Maybe the 5% adoption rate is more reflective of today’s environment,and not just last year’s. That would bring the number of users down to 12.5 million, but with the other assumptions intact, average transaction volume would be a little more thatn $3, and the total number of Venmo transactions would be 2.275 billion, or about one in five P2P transactions. STILL NOT REALISTIC.

If Venmo users averaged one transaction per week, then transaction volume would be in the 650 million range (6% of total) and average transaction volume between $11 and $12. This is feeling a lot more realistic, but I hate to imply that Dan Schulman was wrong. Maybe he meant “the most active” Venmo users, and not “average” users. But if he was right, then for the numbers to make sense at the aggregate level, Venmo adoption is probably closer to 1% than 5%.

Monetizing Venmo

With $7.5 billion in transactions flowing through Venmo, that must be driving a ton of revenue for PayPal, no? No. Venmo users don’t pay for the service (as long as the money is coming from their bank account or debit card).

And therein, of course, lies the challenge of every freemium product or service: How is it going to make money? According to Business Insider, Venmo has a plan:

PayPal announced Venmo Pay, which will enable merchants to accept Venmo payments from customers for a fee of 2.9% of the value of the transaction plus $0.30. PayPal will first roll it out to merchants that accept in-store PayPal transactions, and the firm expects to achieve full monetization by the end of 2016. This in-store push could be successful given that Venmo has reached critical mass, and that customers are using the app frequently. This makes them more likely to be willing to use the app in new environments.

My take: Somebody is smoking the wacky weed out in PayPal country! Surely PayPal execs:

  • Have seen the trend among younger consumers (i.e., adult Gen Yers) to increasingly use credit cards. The reason for this is simple: Rewards.
  • Have seen the (albeit, as yet unsuccessful) efforts of MCX to create a payment mechanism that eliminates interchange fees altogether. The reason for this is simple: Merchants don’t want to pay 0.9% of the transaction value and $0.03 let alone 2.9% and $0.30.
  • Can guess that Venmo users might not appreciate the social aspects of a B2C payment as much as they do for a P2P payment.

The Future of Venmo

An in-store push for Venmo is going to fail miserably. Venmo has succeeded as a P2P tool because: 1) It became cool; 2) It was free; and 3) The alternatives sucked. As a B2C payment tool, the alternatives to Venmo don’t suck, and Venmo isn’t free. And Venmo isn’t cool–at the moment, at least–as a retail payment method. The future of Venmo is not in retail.

The future of Venmo is Use Case Specialization.

Use case specialization is not a real term. Wim Rampen would call this “jobs to be done.” In the world of P2P, there are many use cases, or jobs-to-be-done: gifting, splitting a restaurant or rent bill, repaying a loan, making an alimony payment, buying something from someone on eBay, etc.

Here’s the reality of P2P payments in the U.S.: Consumers will never pay to pay these types of transactions (banks learned this the hard way, PayPal probably knows this very well).

Here’s another reality: Splitting bills, repaying friends, buying things from other people comprise a tiny percentage of overall P2P payments.

More reality: Repaying loans and making alimony/child support payments comprise a larger percentage of the P2P pie than splitting bills, repaying friends, and buying things from other people combined.

The key to driving Venmo growth–and monetizing the service–will come from creating solutions and services that address P2P use cases:

  • Most P2P loans occur between people who know each other–not on Lending Club (which, for all intents and purposes isn’t even a P2P lending platform). Venmo will (should) create the ability for two people to create an agreement online, and enable the borrower to pay the lender through Venmo–for a fee.
  • An Austin, TX-based firm called SupportPay is already establishing a capability for exes to make alimony/child support payments, and track the payments made with those funds to ensure they meet child support requirements.

Venmo will (should) create similar capabilities, or acquire firms that create similar use case-specific P2P services.

The key to Venmo’s future is moving upstream in the P2P value chain–not into the retail/B2C environment.

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