Cold hard cash.
It used to be king.
But in a world where you can pay someone by
swiping a few times and clicking a button,
consumers are opting to transfer money online
instead.
They are the two words all millennials seem to be
using these days.
Venmo me!
One popular option is Venmo.
If you haven't used it yet there's a good chance
you will soon.
The peer to peer payment app, owned by PayPal has
become a household name.
I don't have Venmo.
Katie get Venmo it's free.
The finance app also operates like a social
network and lets you comment on payments seeing
who and what your friends are spending on.
It all happens pretty seamlessly from your phone.
But on the back end it's not as simple as using
cash. Some have concerns over data and the fact
that it's not a bank and Wall Street is waiting
to see if it can really become a moneymaker for
its parent company.
It's a real concern.
Venmo isn't profitable.
It is a very strong social network.
Personally freaks me out that people know who
they paid and who paid me.
But I guess millennials like that.
Let's take it back to where this all started.
Venmo was founded a decade ago by two former
University of Pennsylvania students.
He was visiting me in New York and didn't have his
wallet so I covered him for the whole weekend and
he wrote me a check to pay me back and we thought
this is silly we should be using our phones to do
this.
It was later bought by Braintree for 26 million
dollars.
Not billion million.
Braintree was later bought by PayPal.
Bill Ready CEO of Braintree at the time and now
chief operating officer at PayPal is the man
responsible for bringing the no name app to
mainstream fame.
The name Venmo comes from the Latin vendere and
mobile and sort of bringing those two things
together.
We really wanted to be the way people would pay
for everything.
Braintree is platform helped PayPal Dive into
Mobile which is now about 40 percent of its
business. Bill had us to PayPal's New York City
offices where Venmo is headquartered.
It's come a long way from where it had been at one
time the early vinyl office literally there were
10 people in the office unfinished floors and it
was so crowded that for me to do conference calls
I'd go up on the rooftop which was unfinished --
like tar roof.
Ready has founded five startups and has a
background in software engineering.
He bet on mobile payments before banks were in
the palms of our hands.
Now you look back at it we did 19 billion dollars
in volume last quarter alone drawing 80 percent
plus year on year still so 26 million
dollars now looks like a steal.
Back then people thought was crazy to pay that.
The app has since evolved into a crown jewel and
PayPal's digital payments empire.
For all of 2018, the app processed 62 billion
dollars in payments – a 79 percent increase from
a year earlier and the company says it's on track
to reach 100 billion dollars by the end of 2019.
Getting users on the platform has been a snowball
effect. One estimate from eMarketer says Venmo
has attracted twenty seven point four million
people.
Each user begets other new users and becomes more
engaged over time.
Profitability. What will that take?
Venmo's most now one of the largest mobile apps in
the world by dollar volume I think in the U.S.
you'd put his top two or top three.
And so you know we're really focused on you know
the growth in the market share that we're
capturing and making sure we have modernization
and line of sight to profitability but not
necessarily trying to get to profits today.
We want to make sure we go capture that market.
Bottom line Venmo's still not breaking even and it
won't be for a while.
So part of its appeal is that it's free which has
attracted a ton millennials.
But how do they plan to make money eventually.
The company does charge for certain events.
If you want to use a credit card instead of a
debit card on Venmo it's a 3 percent fee.
And if you want money in your account faster than
the typical one to two day wait you could pay for
that too.
The company also partners with Uber, Chipotle,
GrubHub and others and makes money off of those
partnerships.
The primary way that we make money on Venmo is
really by merchants paying us for the acceptance
of them which is the same way that PayPal makes
money, you know merchants that choose to accept
Venmo you know they pay us a small fee to accept
payment from a Venmo user.
Venmo is not a bank though.
Paypal has money transmitter licenses.
The money in your account is actually held at a
partner bank.
It's a common setup for fintech companies that
don't have a bank charter.
The tech company handles the front end and it may
appear as though the money is sitting in an
account on your phone.
But it's really not the partner bank is the one
holding that money.
It all means that money you keep on
Venmo's platform is not insured by the federal
government – like it would be in a standard
checking or savings account.
I mean no aspirations at all to become a bank.
It's not the business that we're in.
We're partnering with major financial
institutions that hold that money for us.
Wells Fargo is a major partner for us on that but
we work with a number of them.
They're not paying you interest when you keep your
money there.
They're also not lending it out like a bank can
but they're making a little bit of money.
Would you guys ever invest that money?
Separate from Venmo if you look across PayPal we
will hold balances in some very safe investment
grade securities - think government treasuries or
things like that.
And so do you earn interest on that I assume?
A small amount.
Yes.
Got it.
But that small amount can really add up for a
company holding a boatload of cash, offering a
big moneymaking opportunity for Venmo.
So how does Venmo actually work?
You link your bank account type in someone's
number the dollar amount and send it but it's not
all that easy.
Think of it as a duck going across water.
It looks very smooth to the consumer but below is
their feet moving very quickly.
You send money to me Kate.
It shows up on my Venmo account real time but the
money is really not my bank account.
Could I go spend it.
No. Can I go to the A.T.M.
and use it.
No. So how Venmo works if I wanted to get it and
move it into my bank account.
Then I have to go into the traditional bank
system we call ACA or the Automated Clearinghouse
and that's when all the friction happens.
Just like our roads and bridges are broken our
payment infrastructure is old and broken.
All the transactions are batched up sent to the
Federal Reserve and it's sent overnight to your
bank.
And so it's very inefficient and it really shows
up the next day between the banks.
Venmo is hardly the only game in town for digital
payments. Square's popular peer to peer cash app
has similar features and according to one report
is growing even faster than Venmo.
The Square Cash app downloads have actually
exceeded venomous every month that passes by the
gap between the two keeps widening.
So literally Square Cash adds about 2 million
users every month which is amazing.
If you go on Google Trends and type Square Cash
what you'll see which I thought was striking is
along the southeast that's where most people have
search for Square Cash.
You don't see that as much in the Northeast and
sort of the Pacific West.
And the interesting thing there is it turns out
that is a socioeconomic thing to this Square Cash
app. It's become sort of the go to app for the
under banked whereas Venmo is still being used a
lot but is a different socioeconomic group of
people I'd say like a cliché is like Millennials.
Got it.
It's sort of the coastal millennials are using
Venmo?
Pampered millennials versus hard working under
banked. So I mean so I'm exaggerating but that's
sort of like the way it turned out.
But Bill Ready insists Venmo is also going after
the under banked this aspect of finding ways to
get the underserved while that's on the consumer
side. Merchant side into the digital economy
extremely important not just for us but I think
to the health of the economy.
Banks are also getting into that P2P payment game.
The big banks JP Morgan, Bank of America, Citi,
Wells Fargo and others launched Zelle in 2017 and
Zelle is a little bit different than Venmo.
There's no middleman so it's directly integrated
with the banks.
There is more security around it because there's
more compliance because the regulators look at
that and look at those transactions and ensure
that you're doing it a proper way.
According to a Wall Street Journal report Venmo
was hit by a wave of payment frauds in 2013 that
helped push losses higher than the company
previously expected.
They recorded an operating loss of about 40
million dollars nearly 40 percent higher than the
loss for which the company had budgeted.
In a statement to CNBC PayPal said Venmo loss
levels are lower than the overall average for
PayPal and compare favorably to the industry when
introducing new features it is not unusual to see
short periods of elevated losses Reddy said
preventing fraud is one reason they collect data
which has gotten other tech companies like
Facebook into hot water.
To be very clear we're not in the business of
selling people's data.
We don't engage in that.
We leverage things about the device and those
types of things for fraud protection purposes.
In terms of the user's information being shared
the user is in full control of what they share.
Financial technology or fintech has a higher bar
for regulation Venmo has run into issues with the
FTC but it settled.
The industry watchdog accused Venmo of misleading
customers when it came to privacy disclosures and
some information being automatically displayed on
Venmo social news feed.
The FTC also alleged that Venmo misrepresented the
extent to which consumers financial accounts were
protected by quote bank grade security systems.
We have been a pioneer in the space when you're
doing things that have never been done before
you're trying to make sure you do the best that
you can to to work with regulation that exists
but sometimes that regulation may not speak to
new things that have not been done before and the
FTC settlement much of it was addressing things
that we had already addressed.
But we have absolutely made sure to implement all
the recommendations.
We always work very closely with regulators.
We really take an approach that we have a common
interest with regulators.
Venmo has had to comply with international
sanctions and law enforcement which can be tricky
when people are communicating with emojis.
So how do you distinguish what's a joke and
what's really a threat.
So we actually from regulators get a list of
keywords and if people use those keywords or
names that might be on a terrorist watch list any
of those kinds of things we are obligated to go
intervene and report those.
Now what we're able to do in those is give the
user a way to go explain what it was like OK you
weren't buying goods from Cuba you're buying a
Cuban sandwich.
Are there certain emojis that would trigger a
warning from Venmo.
We don't have a list of embargoed emojis just yet
but maybe that's coming in the future.
So Venmo has revolutionized the way we think about
cash. But Wall Street is still watching to see
whether or not it can really become profitable
for its parent company PayPal.
Like any fintech company there are plenty of
challenges. The bar for regulation is very high.
There are data and privacy concerns.
And of course they've got tons and tons of competition.