Venmo – Should Banks be Worried?

The peer-to-peer money transfer app has changed the way we think about cash and how to spend it.

Venmo is one of the many fin-tech start ups that have changed the way people spend money. It is a popular peer to peer money transfer system that allows users to quickly and conveniently transfer money to other users on the platform, regardless of any bank affiliations which had previously divided individuals. In contrast, users are able to find peers via username, email, phone number and even Facebook contacts – which has shifted the use case to be much more social than ever before.

While such a tool like Venmo does not completely eliminate the need for a bank, it poses a significant threat to traditional bank and credit card business models. Historically, banks have relied on large, stable low-cost deposits from customers in order to then offer higher yielding loans and other bank products. In addition, credit cards rely on transaction fees as well as late fees from consumers. While Venmo does not necessarily mean the end of these sources of revenue, there is something to be said about the estimated $20bn of payment volume Venmo expects to process this year. As peer to peer money transfer systems take share in transactions, banks and credit cards stand to lose on deposit balances & fees, transaction fees and so on. One countervailing notion to this is that Venmo may be enabling more transactions to happen than ever before. In that case, Venmo could actually be encouraging more spend, eventually leading to more fees, deposits or earnings down the line. As the array of mobile financial products increases, it remains to be seen what the true net effect of all of this will be. However, I am of the notion that Venmo and other technologies will continue to take share from traditional banks to such a degree that they will likely be made worse off, as cash becomes distributed amongst a wider array of financial services.

Venmo can deliver to consumers in a way traditional banks cannot due to several differences in their operating model. First, Venmo eliminates historical barriers that have come from bank to bank transactions. For example, it was typically the case that a Bank of America customer could not easily find and transact with a Chase customer. Sensitive information such as routing numbers would need to be collected and exchanged each time a transaction was done, and information on how or where to do this was not straightforward. Secondly, its mobile application allows for much greater convenience in comparison to transactions typically done by check, computer or bank branch. By eliminating these barriers and making a truly convenient way to lend with peers, Venmo has allowed for smaller, more frequent transactions among a much more expansive network of people. Also unlike its competitors, Venmo has become as much a social app as a financial tool, leading to much higher consumer engagement and use. As Venmo’s popularity grows, it will become increasingly difficult for new entrants to compete with Venmo’s network.

Going forward, I believe Venmo should be fully focused on increasing its user base. It has become clear that the network effects of a payment app can be particularly strong given the difficulties and inconveniences associated with frequently transferring sensitive bank information. The expanded network will not only have compounding effects on the convenience of the app, but will create a compelling and sustainable competitive advantage. In addition, as Venmo continues to take share of wallet, the data it collects around customer transactions will become increasingly valuable.

Building off of Venmo’s customer promise on convenience and ability to eliminate cash transactions, I believe an interesting area of growth could be in foreign exchange, particularly in the backdrop of increased globalization. As much as credit cards have allowed customers to avoid foreign transaction fees while traveling internationally, there will always be vendors and individuals around the world who will have a preference for cash. Given Venmo has eliminated historical divisions due to bank affiliations, perhaps it can also serve as an intermediary for those looking to exchange currencies across countries and allow individuals to transact at low-to no transaction fees. As an example, if Harry wants $11 to buy a T-shirt in New York, but has €10 in his European bank account, and separately Amanda is wanting to purchase a €10 hat in Paris but only has a US dollar denominated bank account, Venmo could conceivably transfer Harry’s euros to the Parisian hat store while Amanda’s dollars are transferred to the T-shirt shop in New York. Assuming all parties associated with this transaction used Venmo and there was a critical mass of participants around the world, such a matching process may not be too far out of reach. (779 words)


Caterpillar and the Internet of Big Things


Wild Technology for Wild Wings – a Restaurant with no Servers?

Student comments on Venmo – Should Banks be Worried?

  1. I agree that Venmo has reduced some barriers to spending, but I see a threat to its business model. Venmo relies on maintaining the money in its ecosystem until the users actively transfer their funds back to their banks. This can be cumbersome for users. Square offers a service called Cash, that has the same function as Venmo, but transfers the money bank to bank.[1] Additionally, banks are offering mobile intra-bank transfer services. It is only a matter of time until they begin to offer inter-bank transfers.

    [1] Square Cash. Accessed November 18, 2016.

    1. I agree with AMM’s point and see several major risks for Venmo. Fist, there are relatively low barriers to entry for competing banks – who already have great degree of comfort with the regulatory framework that governs these types of transfers – to offer this service. In other words, I see peer-to-peer electronic funds transfer applications as only a bridge technology until the major banks begin to offer this service as a low cost, moderate value add to customers. Second, Venmo assumes the risks of data loss of any large bank without the lengthy history and capital to develop secure data protection systems. See below for an interesting discussion of some of the recent security concerns:


  2. Venmo’s network effects are extremely strong, and contribute to much of my optimism for the platform as a user. It will be interesting to see how long it takes the banks to catch on to the ease of these transactions. Chase and other banks have created “Quick Pay” platforms which enable the transfer of funds between customers, but there is still an enormous amount of friction. There are few if any functions that a bank controls that have network effects, so a platform that does could offer an enormous amount of value to a bank.

  3. I’m not concerned about Venmo’s threat to banks for two reasons. 1) The vast amount of transaction volume and cash held at banks are commercial in nature (i.e. businesses and corporations), not personal/retail (see article below [1]). If I recall correctly, something like 98%+ of all money transfers (by value) in the US are for business transactions rather than personal expenses, and it’s not likely that Boeing is going to start Venmo-ing GE for their airplane engines anytime soon. 2) Venmo still seems like it’s more of a complement to banks rather than a potential replacement. What I mean is that Venmo does not provide any of the traditional, basic functions of the bank such as lending money and paying interest on deposits. Thus, I see Venmo and banks operating a interrelated, but fundamentally different spaces.


  4. Thanks for this post, Gabrielle.

    As a user of Venmo, I certainly agree that peer-to-peer money transfer apps are a threat to traditional financial institutions. However, I’m skeptical of the degree to which these apps will threaten the traditional firms for a few reasons. First, banks are taking measures to build their own apps / programs or work together to provide the peer-to-peer money transfer function. J.P. Morgan, Wells Fargo, Bank of America, U.S. Bancorp and Capital One Financial Corp have joined forces on clearXchange, a bank-owned platform that would allow immediate transfers. (1)

    Second, these new companies will have to navigate regulatory and legal environments. For example, companies like Venmo are not a bank taking institution, meaning user balances are not insured by the government. (2) For users to use sites like Venmo, they would have to be comfortable with this risk. I also wonder if companies like Venmo with their shorter history have all of the necessary compliance practices in place such as anti-money laundering considerations.


  5. Thanks for a great post!

    I agree with FFF and AC above in that I don’t see Venmo as a threat to banks for a few reasons. First, there isn’t actually a lot of money in P2P transfers (except for those with a cross-currency component) – Venmo doesn’t charge for the service, nor do banks through the ACH network. Also, most Venmo users fund their transactions using a debit card-linked bank account, so the banks still maintain their customer relationships / deposit bases. I think the biggest opportunity for Venmo is in facilitating merchant payments, where they will probably charge the industry standard 250-300bps on transactions – but even here, the threat is to merchant acquirers like First Data and FIS, not to banks per se.

    What I’m interested in seeing is whether Venmo ends up rivaling the volume of its own parent company (PayPal), and how the two brands coexist in the future.

  6. I’d approach this question in a similar manner to Heather’s post on LendingClub…because the barriers to entry on payment systems are so low, there is little reason to think that VenMo will stay around in the long term. I think that it is a valid point that increasing its user base will prolong VenMo’s competitive position within the market, as users are less inclined to uninstall and sign up for a new application, I’d look more to how the digital transformation of payments affects the regulatory environment. Ultimately, I believe that the biggest players (i.e Financial Institutions) will emerge as winners, as they are able to leverage their scale to satisfy regulatory obligations and address cyber security risks.

  7. As an active Venmo user, I do believe that apps of this nature are disrupting the conventional business model as highlighted in your post. The only area I would critique is the ‘network effect’ – Does this space really have a low barrier to entry? Imagine if a Facebook or Google comes out with a really secure product that offers additional savings to customers (by means of sharing the interest Venmo makes of the large pool of customer money). I can easily see the Venmo world switching to something backed by a Facebook/Google.

    Lastly, I would encourage you to lookup the Transferwise model ( that works on the ‘Hawala’ system ( as this ties into your suggestion of how Venmo can be used with regards to foreign exchange.

  8. Thanks for the interesting post. I agree that Venmo has fundamentally changed how consumers move money to one-another, however I am curious as to why they have not moved faster into the B2C payments space. I think part of the focus purely on C2C rests on the fact that Venmo is owned by PayPal and that PayPal is focusing more on the business transaction market. I am a user of both the PayPal app and the Venmo app, and the Venmo app is far easier to use than the paypal app. With that in mind, I think Paypal is making a strategic mistake by not leveraging the Venmo platform for business transactions. Venmo is so easy to use that I envision a wide array of consumers using it to transact with merchants. I don’t think that this strategy would cannibalize the current Venmo business model, either, as I think that this strategy would only increase the total number of transactions occurring on the Venmo platform and would substantially increase its user base.

  9. Until we know what Venmo’s future plans are with the huge customer base they are creating it is hard to gauge how big the threat might be to the banks. Are they planning to become more like a bank? Will they start offering additional products/services to their customers?

    It seems to me like they are still not sure what to do and are plainly focusing on acquiring a huge customer base and figuring out what to do later on.

  10. Interesting post! While I agree with you that Venmo has become a fun social app, I think Venmo may still face larger competitive pressures than noted here. Square Cash gets around the network benefits of being on Venmo, by allowing customers to split bills with folks that aren’t on the platform, and Zelle, the bank’s answer to Venmo could claw back some customers if it’s viewed as being more secure or easier to manage because it’s already linked to a customer’s bank account. For me then, if Venmo wants to stay relevant it should not only pursue global transactions as you mention above, but also start finding ways to advance the platform, such as offering analytics on a customer’s transaction history. (e.g. 45% food, 10% clothing, etc.)

  11. I think what is more interesting for Venmo is actually the amount of data gathered. Given the mandatory “what’s it’s for?” field, users have to explain every transaction. This provides valuable information, at little to no cost (vs. a traditional bank) data would prove valuable in tailoring the P2P platform to better cater to consumer needs. On the flip side, there are serious security concerns as the app has very low security standard compared to Paypal for instance

Leave a comment