Venmo is a digital payment app that has gained widespread popularity in the US and is poised to change the payment infrastructure for the future. It launched publically in 2009, and within five months, gained enough users to be bought for $26.2 million by Braintree—another major payment processing service serving clients like Airbnb and Uber. Braintree was then acquired by PayPal, converting Venmo from PayPal’s direct competitor to its subsidiary (1).
Venmo’s growth has been extraordinary. Business Insider reports that quarterly peer-to-peer payments volume for Q3 of 2015 through Venmo had exceeded $2 billion, more than three times the volume in Q2 of 2014 (2). Although Venmo faces many strong competitors also going after the payment space, it differentiates itself from major players like Google Wallet and Apple Pay through seamless integration of its business and operational strategy to serve its core value proposition: making payment an easy and sociable experience. You know a company has made it when it becomes a verb; “Venmo me” is now often heard in place of “pay me back.”
Venmo’s homepage looks quite similar to the Newsfeed feature of Facebook, precisely for the same purpose: to create a livestream of friend-to-friend payment activities and to foster a social and “experience-sharing” atmosphere. The actual user interface is very similar to Facebook as well: one has a “homepage” and could add friends to grow your network. In contrast to other digital payment systems like Paypal and Google Wallet, transactions are very intuitive and simply require a few clicks, with the opportunity to use fun phrases and emoticons to describe the reason for payment. Even the simple blue and white backdrop and friendly font serves to create a less intimidating environment for users. All operational decisions align with Venmo’s mission to create the “social” payment experience.
The Network Effect
Similar to Facebook, Venmo’s overall strategy has been to serve the needs of its core customers for free, and then to harness their activity to create value for a different set of customers who are willing to pay. For Facebook, these paying customers are advertisers, while for Venmo, they are individual businesses who pay a 2.9% fee to use Venmo API to charge customers. Importantly, the more Venmo keeps its core users happy, the more users there will be and the more value created for its paying business customers. This traditional network effect, where the value of the service increases with the number of users, applies to both the core users who benefit from having more friends on the platform, as well as paying businesses who have access to a larger customer base.
This network effect creates a business model that is focused more heavily on the demand side (versus supply side, which creates economies of scale), feeding into Venmo’s operational focus on acquiring users through social appeal, ease of use and fee-free service. Importantly, there are no ads or other accessory services, with revenue only coming from the 3% credit card charge for users and the 2.9% fee for businesses. Rather than focusing on monetization, Venmo is strategically prioritizing user acquisition as it understands that monetization will naturally follow. Working to its advantage, furthermore, is the fact the marginal cost of obtaining each new customer through its digital platform is essentially zero. Expectedly, Venmo expanded quickly first into large coastal cities like San Francisco and New York (3).
Venmo has recently come under scrutiny with scammers taking advantage of the lag time between confirmation of a transaction on the Venmo platform and the actual back-end processing with the bank (4). Just as it has taken Facebook years and numerous ups and downs to gain the trust of its users surrounding issues of privacy, Venmo will likely have its own share of challenges around trust and security as it grows and scales. Nevertheless, its business and operational models are perfectly aligned for it to become a keystone platform that supports everyday users and merchants across the US and eventually the world.
(1) “Venmo: Its Business Model and Competition.” Seth, Shobhit. Nov 3, 2015. Investopedia. http://www.investopedia.com/articles/personal-finance/010715/venmo-its-business-model-and-competition.asp.
(2) “The Future of Venmo.” Shevlin, Ron. Nov 18, 2015. The Financial Brand. http://thefinancialbrand.com/55401/the-future-of-venmo/
(3) “Cash is for Losers!” Gillette, Felix. Nov 20, 2014. Bloomberg Business. http://www.bloomberg.com/news/videos/2014-11-21/cash-is-for-losers-venmos-social-mobile-payments
(4) “Venmo Scammers Know Something You Don’t.” Griswold, Alison. Sep 15, 2015. Slate. http://www.slate.com/articles/business/moneybox/2015/09/venmo_scam_and_fraud_why_it_s_easy_to_get_ripped_off_through_the_mobile.html