Just Venmo me.
Venmo uses network effects to make social network their business.
“Guys, I’ll pay for this one and you all can just Venmo me.”
As adoption of Venmo’s interface for peer-to-peer payments has increased significantly, this phrase is becoming all too common in everyday conversations amongst millennials.
How does it work?
Venmo allows users to create an account by syncing their major US bank or debit card information to their profile, and allows users to transfer money to friends (as long as they have Venmo accounts). Using Venmo’s clean, sleek, and intuitive interface, users can easily search their contacts or Facebook friends. (They can invite friends who are not currently users by sending them a pre-populated text through their contact list.) Users then click who they want to pay, write in an amount, and write a caption of what this payment is for. No transaction fee. And can be accomplished with as little as 4 clicks.
Venmo is technically a finance app, and competes with players such as PayPal (although they own Venmo) and other financial service applications like Wells Fargo SurePay. But if traditional finance apps only experience growth at about 10%, why is Venmo getting all this hype and experiencing a growth rate at over 60%?
The answer is almost as simple as using Venmo’s app – network effects.
“Guys, I’ll pay for this one and you all can just Venmo me.”
“I don’t have Venmo.”
“Wait, you don’t have Venmo?”
Venmo’s value for a user increases the more his friends become users. For one, this allows him to pay or request payment from a wider circle of friends, making it easier to split a dinner bill, pay rent to his roommate, or give some gas money to a friend.
Venmo’s Facebook-like newsfeed has added another aspect to this financial app – a social network. The newsfeed allows users to share (if they want to) and view other friends’ payments. The newsfeed does not show the dollar amount, rather it shows who paid who, and for what. These “for what” captions tend to be humorous and creative (let’s put it this way, the default option is a “kale salad”) and create a fun story about what friends are up to – who’s went for drinks with who, or who got charged for a flight to Florida. These are intermixed with various emoji icons that do their best to tell their own story of what happened. Venmo’s newsfeed has become a haven for inside jokes between friends, and the source of users spending time – other than time spent actually transferring money – on the app browsing the newsfeed, just like one would do with Twitter or Facebook.
Venmo’s almost “overnight” success begs the question, how long will this continue? What does another entrant need to do to pull away some of Venmo’s increasing share in this space? While banks such as Wells Fargo are becoming more and more interested in this space, what should they be focusing on? Before Venmo, one may have answered this question with “easy to use”, “free”, and “intuitive.” But now, is “social network” a vital ingredient for success in this space?
More importantly, will Venmo leverage their ever-increasing base of users to expand into a new space? Emerging peer and technology-based markets such as peer-to-peer lending could hold significant promise for a company like Venmo.
For now, we can expect Venmo’s user base to continue to expand, payment captions and emojis to become funnier, and (hopefully) your roommate to accept your Venmo charge for last month’s rent.
Student comments on Just Venmo me.
Do you think Venmo has enough of a competitive advantage here to maintain relevance even if banks choose to move into this space? If banks make it easier to pay people across platforms (i.e. make payments to customers using competing banks) does Venmo become obsolete? Is it entrenched enough in users for it to still be the go to platform for payments? Or will it become just another app that is just adding to the clutter on one’s phone?
I agree that Venmo could be at risk from traditional banks, however, considering how long it took my brick and mortar bank to create an app that was remotely usable (and really only for people with the same bank), I think this is a long way off. During this time to scale, I think Venmo will continue to become a verb the same way Uber has. In addition, because it has such a large following, it sort of becomes a default mini-bank account. It feels like fake money that I send and then receive back. For some reason I find it more comforting to see occasional big charges on my credit card (much of which I receive back in Venmo and then spend when other people pay) than to see multiple small charges. The buffer of money in Venmo, increases my willingness to engage in social money spending without the stress of seeing a ton of charges in my account.
Great post, SC!
Really curious to see how they plan to capture some of that value they created. At the moment I’m guessing they’re probably getting interest on all the money users have on the app (i.e., their balance – money that Venmo “owes” its users). I would assume (or hope) they’re subject to limitations similar to other banks, so maybe the amount invested, and the types of investment, would hinder returns.
Yes, they currently capture interest on user’s Venmo balances. More frustratingly, if you have pay a charge that is higher than your venmo balance, they pull the entire amount out of your bank account rather than eliminating your venmo balance and then dipping into your bank account for the residual amount.
To the point below about Apple Pay crushing Venmo: This is a potential threat but isn’t it highly likely that a peer to peer payment network through apple pay will only available to iOS users (same for google wallet / android)? In that case, Venmo has the benefit of working across platforms. Multihoming is kind of a pain, in my opinion, and I wonder what kind of incentives apple pay or google wallet can provide to convince users to multihome.
Hi. I know I made a comment in class that Venmo earns interest on money sitting users’ accounts. However, that was a mistake (I forget where I heard that originally). I attended a talk by Venmo last week where they explained they actually don’t earn any interest on money in your accounts.
Which makes the question of how Venmo will monetize even more interesting. Rather than charging users (which would drive them away), it seems Venmo could earn more by partnering with third-parties who want to use their technology / integrate into their platform. Similar to how PayPal (Venmo’s parent company) is integrated into many websites’ payments platforms (e.g., airlines), Venmo could become the payment platform for mobile apps.
Whoa! That’s really interesting. I had always heard/thought that Venmo made their money based on interest.
Really enjoyed reading this. For the longest time Venmo did not accept my credit union, so I was a pain at dinner whenever it came time to split the bill. Even though I was eventually allowed to join Venmo, much to the delight of my friends, I am unsure how Venmo will perform in the future. All Apple has to do to crush Venmo is make Apple Pay peer-to-peer and have it automatically installed on every iPhone. Venmo has the name recognition and even became a verb (“Venmo me!”), but it needs to do more if it wants to be viable in the next few years.
Venmo was a great company to write about for network effects. My opinion is that the threat of banks to enter the P2P payment space is low for several reasons. Aside from the obvious fact that banking institutions are slower in embracing innovation, they also do not generally have the know-how of creating an intuitive consumer-facing UI. Moreover, Venmo can be “Switzerland” among all the banking institutions and credit card companies to attract a larger base of users. A single bank may have a harder time trying to integrate with another bank, which reduces the ability for them to take advantage of network effects. My question is: why was Paypal unable to launch a similar app before Venmo? Paypal obviously realized its mistake as it acquired Braintree in 2013, but I thought that Paypal would have had the user base and product capability to create something like this.
Great article. In Europe, a number of banks are launching their own “peer-to-peer” payment apps. It will be interesting to see how Venmo reacts when these apps become more widespread in the US!
Terrific example of the value of direct network effects. It’s just such a deal breaker when a friend doesn’t use Venmo. I worked in London this summer and Venmo hasn’t launched there. It led to a lot of painful happy hours. I find Venmo’s social features amusing – it makes the process of parting with my money slightly more pleasant, but I wonder if any increased value can be unlocked from these interactions. I suppose I could see a scenario where ads are inserted into this feed – proactively pushing bars and restaurants that might give each user a venmo credit or discount if they head to their restaurant, but otherwise my imagination fails me. I think the next step for Venmo would be to integrate their payment systems with vendors and POS devices. It would be incredible to pay a bill via Venmo – and for each person to chip in their amount at a restaurant until a bill is paid. For now I’ll keep sending emoji payments to my friends.
This is a really great example about network effects. Have you considered how they compete with other apps such as Google Wallet, Square Cash, or even PayPal? Do you think this is a winner-takes-all game or is there is space for multiple platforms to be profitable? Although Venmo differentiates on its social aspect, I wonder if this is also a weakness that will eventually hurt growth because of security concerns.