Every year, billions of dollars change hands in needlessly clumsy ways. Parents realize they’re short on cash and go out of their way to stop at an ATM so they can pay their babysitter; grandparents mail checks as birthday gifts, which take days to arrive and days to clear. Even as more and more of life is lived through a screen, paper is still how the vast majority of Americans give each other money.
In the past few years, a handful of tech companies have recognized these inefficiencies, introducing apps — such as Circle Pay, Square Cash, and Venmo — that let users transfer money to one another’s bank accounts using their phones, relatively frictionlessly. Among other things, they let users enter their bank-account information and then transfer money to others who have done the same. With Venmo, one of the more popular of these services, there is an additional wrinkle: Once money is transferred, the exchange shows up in the app’s social feed, a running record of who went out for drinks with whom, or whose roommate pays the electricity bill each month. (Users can elect to make a transfer private, but most don’t.) The app has among many — mostly young, city-dwelling people—attained a level of linguistic uptake reserved for the likes of Google and Uber: “Just Venmo me,” they say, after picking up a dinner bill.
The feature that sets Venmo apart is the social feed, which brings transparency to a class of transactions that used to be entirely private. The feed — an emoji-laden stream of often-indecipherable payment descriptions and inside jokes — seems frivolous; it is not a social-media destination in the way that Facebook or Twitter is. But as a public record, it is quite revealing of social dynamics — who’s hanging out with whom, and perhaps where. A friend of mine told me that Venmo proved invaluable in trying to determine if her ex and his new girlfriend were still dating.
In other words, pointless and goofy as it seems, people do pay attention to what they see in Venmo’s feed. And there’s actually a way this parade of public transactions might give the app a significant advantage over its many competitors.
The reason, says Richard Crone, who runs a payments-focused firm called Crone Consulting, has to do with how Venmo makes money — or, more precisely, how it will make money. Currently, Venmo doesn’t directly generate all that much revenue for the company that owns it, PayPal. (Contrary to what some of its users may have guessed, the app doesn’t make money “on the float” — that is, by investing whatever funds users keep as a positive balance in their Venmo accounts.)
Things could look different not too long from now. Venmo’s plan, which it has already initiated and will expand in the coming year, is to facilitate more transactions between businesses and their customers. Last summer, Venmo introduced partnerships with about a dozen apps (including the food-delivery service Munchery and the fast-food chain White Castle) that now let users pay straight from their Venmo accounts. The idea, Crone explains, is that Venmo would take a cut — its standard rate is 2.9 percent plus a small flat fee, which is at the higher end of what merchants pay for a typical credit-card transaction — of not just in-app purchases like these, but of in-person transactions at physical checkout counters, where customers spend trillions of dollars a year.
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This is where the social feed comes in. “You walk into any retailer, any restaurant, any service provider — what do they want you to do? Like them on Facebook, follow them on Twitter,” Crone says. Working with retailers would give Venmo a business model similar to credit-card issuers and processors — “but with much more upside,” he says, “because the retailers spend far more trying to get you to like them on Facebook and follow them on Twitter and all these other things that they could just get as a byproduct of the payment.” That is, if someone paid for a taco using Venmo, their friends might see where they ate lunch.
One limit on this strategy’s effectiveness is that consumers might not be eager to publicize every one of their purchases. But Venmo is aware of this: In the year or so since it started trying its service out with a few businesses, the default setting has been for payments not to be shared in the social feed. Still, Bill Ready, PayPal’s chief operating officer, recently told Barron’s that when the initiative is expanded, “social aspects will be not only present, but also be what’s most attractive to our users.” And Fast Company has reported that a job-application prompt for prospective Venmo employees last year mentioned research finding that “Venmo users are more open to purchasing at new businesses … that they learn about from friends on Venmo.”
But the other, even more lucrative aspect of becoming merchants’ preferred means of payment is access to information about where customers are spending their money. “The real value is in the data, and the ability to render customized ads and offers, and generate a revenue stream from that,” Crone says. “We estimate that the value of mobile payments per enrolled active account is worth more than $400 per year in revenue, to whoever does it — Venmo, Apple Pay, Android Pay, Samsung Pay, a bank, Visa, or Mastercard.”
If Venmo or another service were to gain access to this payment data, the typical recipients of it would start missing out. Even though digital-payments apps are built on top of banks’ infrastructure, banks wouldn’t see the details of consumers’ spending, but instead just requests from an app to add or withdraw money from an account. Referring to the value of owning the platform that consumers directly interact with, Crone says, “The one who enrolls is the one who controls” —a phrase he went on to repeat five times in one conversation I had with him.