Venmo is a free mobile app that enables users to make person-to-person money transfers for shared expenses (e.g. splitting dinner), services rendered (e.g. helping a friend move), and goods sold (e.g. businesses selling products). The app is only available in the United States and has over 70 million annual users including 2 million businesses who accept Venmo.
Venmo setup requires users to connect a bank account which is used to fund their balance and will be debited to execute transactions that exceed their balance. An example use case is a group of five friends going to dinner, wanting to split the bill, but the restaurant only being able to split it three ways. One person can pay the bill and send Venmo requests, noting that it is for dinner. The attendees receive the request and complete it. The requestor has funds added to their balance and can keep the balance in Venmo or transfer to their bank.
Venmo creates value through three features: secure person-to-person money transfers via mobile devices, large network of users able to receive transfers regardless of their bank, and a newsfeed feature offering transaction documentation and visibility of friends’ payments.
Secure Money Transfers: Venmo is not a bank; it is regulated as a money service business. Venmo works with a bank partner to hold all funds in users’ accounts. Venmo offers immediate Venmo balance transfers between users via a virtual ledger. The ability to transfer money between users replaces check writing and cash payments. The value of offering these transfers via a mobile app is that they can be completed remotely and without the inconvenience of carrying a checkbook or chase.
User Network: With over 70 million users, Venmo’s network is a major value creator. If you are out with a group, especially Millennials, it is likely many use Venmo. You can search users based on their name, phone number, or email address. The large user base offers network effects and increases the convenience offered. Additionally, if a person is not on the app, you can send them money, and they will receive an invite to join and accept the funds.
Social Newsfeed: The app offers visibility into who is transacting and what they are paying for. This visibility creates value by encouraging collaborative purchasing and applying pressure friend who never pay you back on time.
Venmo captures value by receiving interest from its bank partner on balances held in users’ accounts, from interchange fees charged to businesses, and from fees for premium features like using a credit card to fund your balance or expediting withdrawals (which usually take 2-3 days).
Venmo’s scalability is high. The app is free to use, only premium features charge fees. Furthermore, the app encourages adoption once one member of a community becomes a user. The ability to send money to non-users, have them receive an invite to join, and unlock the funds creates incentive for sign up. The primary barriers to scalability are non-U.S. status (the app does not allow users to transact with people in other countries) and the requirement of connecting a bank to fund the account (81% of Americans have bank accounts).
Venmo’s sustainability is dependent on the power of its network effects, not its functionality. There are low barriers to entry for functionality. Several competitors have replicated the money transfer system (i.e. CashApp and Zelle) and achieving money service business regulatory status is straightforward. Venmo’s network effects come from the fact that the more people in a social group have Venmo, instead of competitors, the more likely the app will gain more adoption. We can best view Venmo’s network effects by its penetration into different generations. Venmo is the payment app of choice for Millennials based on marketing investments from the 2010’s. Gen-Z poses a risk to Venmo’s sustainability, as they prefer CashApp based on current trends.
If Venmo is unable to penetrate Gen-Z, they are unlikely to sustain the network effects needed to maintain market share. CashApp offers an especially strong threat, as it has lowered the user age requirement to 13 (Venmo’s is 18) in an attempt to gain market share. Venmo needs to invest in acquiring Gen-Z customers to protect its sustainability. Outside of that threat, the threat of disintermediation is low, as a return to the inconvenience of cash and checks would be the only possible disintermediator.