Venmo’s Real Threat to Banking: Making Payments Fun

History may show that Venmo, part payment app, part social media channel, did more to 'un-bank' consumer payments than any other factor. The mobile P2P app now has stiff competition from bank-owned Zelle and others, but continues to grow rapidly. The reasons why are not all unique, but taken together make it a potent competitor.

Of all the things changed by the pandemic, consumer payment habits was one of the largest. In response to the pandemic, more than eight in ten consumers (86%) say their payment habits have changed, a Paysafe survey found. According to the Atlanta Federal Reserve, 62% of consumers adopted at least one new payment app such as PayPal, Venmo, or Zelle in 2020, up from 54% in 2019.

In the first quarter of 2021, Venmo’s total payment volume grew by 60% year-on-year to $51 billion, according to Statista.

Venmo essentially has five things going for it. They’re not all exclusive to the app, but together they explain its continued growth, even in the face of tougher competition.

1. Venmo Rides the Wave of Mobile Payments

According to the Atlanta Fed, non-bank online payment account adoption increased from 54% in 2019 to 62% in 2020. The biggest winners in the consumer adoption wars were PayPal, which increased adoption from 38% to 42%, Venmo (owned by PayPal), which increased adoption from 15% to 24%, and bank-owned Zelle (11% to 17%).

Zelle, with larger average transactions than other P2P apps, saw the value of payments sent over its service increase by 62% in 2020 and transaction volume increase by 58%, so the mobile wave is lifting all boats.

But even with the growth in mobile payment apps, paper is still on top in the world of person-to-person payments. Cold hard cash accounted for 41% of P2P payments and checks — yes, checks — were used in 6% of P2P payments. Cards were used for almost a quarter (24%) of payments, and electronic means, including payments apps like Venmo, were used for 28%, notes the Atlanta Fed.

Read More: Zelle Stretches Far Past P2P Payments to ‘Digital Cash’ Role

2. An Attractive User Base

Not surprisingly, Venmo users skew younger and more educated. While 32% of U.S. consumers have a bachelor’s degree or higher, Venmo users more than double that at 67%, according to company research. When presented the option, 89% of consumers prefer to pay with Venmo because they trust the brand, its ease of use, and the ability to split transactions with friends. Other apps offer the split-payment capability, but Venmo was early with it and the advantage has stuck.

If it seems like every Millennial uses mobile payment apps, it’s because 94% of them do, according to a NerdWallet survey. In addition, 87% of Gen Zers and 88% of Gen Xers use mobile P2P. Even more than half (65%) of Baby Boomers use digital payment apps.

3. Venmo Is Now a Verb

Chapstick. Kleenex. Google. All have become nomenclature for a category of product or action. Venmo is on its way to joining this status. Owe someone for half of a restaurant meal and you’ll likely hear “Venmo me.”

Do you hear anyone say, “Zelle me”? Maybe in time you will, but at the moment Venmo has the anecdotal edge in brand power.

Read More: The Future of Payments is Fast, Seamless, Safe and Embedded

4. Payments as Social Media

Venmo has made payments a social event. You can set the app’s settings to “friends,” “public,” or “private.” When you sign up for Venmo, Venmo asks if it can access the contacts on your phone. Reply “yes” and those contacts appear on your Venmo feed so you can view their payment activity. You can also link Venmo to your Facebook account and Venmo will add your friends list to the feed.

That way you too can know when someone you graduated from high school with and haven’t seen in 20 years pays back someone for pizza.

Key Difference:

Personalizing payments is a part of Venmo’s strategic growth plan.

You know the money was for pizza and not tacos because Venmo allows you to attach not only a description of the payment, but an emoji as well. Apparently a lot of folks really like both pizza and tacos: there were 9.17 million pizza slice emojis and 5.15 million taco emojis used in 2018.

Read More: Why Apple Pay + Buy Now Pay Later Will Drive Banks to Google Plex

5. It’s (Almost) Free

When you sign up, you link the Venmo app to a bank account or credit card account (or both) and use these accounts to send or receive money. You can also keep a balance in your Venmo account to use as well. There’s no account setup fees and no monthly fees or minimums. Adding money to your Venmo balance from a bank takes three to five business days.

If you need the money immediately, you can always ask another Venmo user to send money to your Venmo balance.

Venmo is not entirely fee-free. If you want to pay for that pizza with a credit card, Venmo charges a 3% fee. If you want government or direct deposits sent to your Venmo app, Venmo charges 1%. If the check is non-payroll or not from the government, Venmo charges 5%. But note the fact that this non-bank app is accepting government and other direct deposits. Deposited cash, as well as the Venmo Mastercard debit card, is handled by The Bancorp Bank.

You can buy and sell cryptocurrencies in Venmo, but Venmo charges a minimum fee and a percentage of the sale or purchase amount.

How Venmo and Zelle stack up

Zelle Venmo
Must sign up to use Yes Yes
Send and accept peer-to-peer payments Yes Yes
Can use credit cards for payments No Yes
Can use to purchase goods No Yes
Can send money to international accounts No No
Can keep money in account No Yes
Charges fees Depends Depends
FDIC insured Yes No
Can share activity on social networks No Yes

Source: Credit Karma

The Bank Advantages (One Is Huge)

While Venmo has a lot going for it, financial institutions are playing an increasingly large role in P2P transactions, mainly via the Zelle app. They have two key advantages:

1. Cashing out
Yes, Venmo has a debit card, handy if you want to reload your Venmo balance, but getting cash out of Venmo can be a bit problematic. Withdrawals at MoneyPass ATMs are free, but you may not have one close by. There are plenty in urban areas, but a quick search finds that if you live in a small town in upstate New York, you’d have to travel about seven miles to the closest MoneyPass ATM. Venmo charges $2.50 for non-MoneyPass ATM withdrawals, in addition to any fees from the ATM owner.

2. Security and safety
Does the fact that Venmo stores user balances within the app pose a threat to banks? While there is certainly money sitting in Venmo that could be sitting in bank accounts, the amounts are typically less than $400. About two-thirds (68%) of mobile payment app users maintain a balance while 32% immediately transfer money to their bank. About half cash out their balance at least once a month. Only 6% leave all the money they receive in the payment app, notes NerdWallet.

It’s smart to keep Venmo balances low since most is not FDIC insured. The exceptions are if you bought cryptocurrency or use Direct Deposit or the app’s cash a check feature which are covered by FDIC pass-through insurance. Nor is your Venmo balance earning interest. Plus, Venmo reviews all of its transfers which can cause delays — an issue if you were transferring money into your checking account to pay your mortgage.

With Venmo, you can cancel the payment until the recipient accepts it. After that, the money is gone. Since Zelle transfers funds immediately, if you send a payment to the wrong Zelle user the money is gone.

Both apps emphasize that users should be careful and only transact with people they know and trust.

In one Venmo scam, you actually receive a large amount of money from someone you don’t know. They then contact you, claiming they paid you by mistake (which is surprisingly easy to do) and ask you — nicely — to please send it back. You’re a good person so you send it back — but the scammers used a stolen credit card to send you the money. You’re out the money with little recourse. Venmo is unlikely to help.

Consumers may trust Venmo to pay for pizza, but not as a secure place for savings.

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