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.
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.
Crone thinks that banks are worried about Venmo’s ambitions. Banks have rightly recognized that convenience, affordability, and ease of use are not characteristics that appeal uniquely to 20-somethings, and so they have in recent years collaborated on a payment platform that does more or less what Venmo does. The product of that collaboration, called Zelle, began showing up last month on the screens of tens of millions of Americans who use mobile-banking apps on their phones.
Zelle differs from Venmo in three important ways. The first is that Zelle appears within users’ banking apps, as opposed to being an app all its own. The second is a consequence of the first: Because Zelle was developed by banks and appears in their apps, transfers will register in users’ bank accounts in minutes, whereas with Venmo, that currently takes days. (Zelle’s association with banks is also a selling point when it comes to security, which Venmo has in the past gotten some bad publicity for, but has since seemed to have gotten under control.) Third, Zelle lacks Venmo’s performative social component.
And, technically speaking, Zelle is not new—the name and the bright purple buttons reading “Send,” “Request,” and “Split” are just the consistent branding given to a payments platform called clearXchange that banks have been using, under other names, for years. In fact, last year, clearXchange processed about $175 million in payments per day, while Venmo’s daily rate was only $54 million. Still, the pre-Zelle clearXchange, which wasn’t given a consistent name or look across banks, left room for more-intuitive apps like Venmo to claim a chunk of the market. They had plenty of time to do that, given how long it took for more than 30 banks, normally in competition with each other, to cooperate and release a cohesive product.
Looking to the future, Crone notes that Venmo’s social feed is something that banks would by their nature have trouble reproducing. “You expect your bank to keep things private,” he says. “With Venmo, you expect them to publicly post.” (When I talked to Melissa Lowry, the vice president of marketing and branding at Early Warning, the industry group that helped develop Zelle, she said that Zelle could add a social component down the line, if banks decided that was something they wanted.)
Of course, because of its reputation for security and privacy, Zelle is arguably much better positioned than Venmo to handle business-to-consumer disbursements, such as when, instead of sending a check, an insurance company transfers a customer money for making car repairs, or when a market-research firm compensates people for participating in a focus group. ClearXchange has already been handling such payments, and it’s not hard to imagine people using Venmo at a fancy restaurant to broadcast their good taste and Zelle for payments that say less about their social status than they do about mundane financial chores.
And at the moment, Venmo’s ability to capitalize on its social dimension is far from certain. When I asked Talie Baker, a senior researcher at Aite Group, about what Crone observed, she wrote in an email, “I think it’s a good point he makes that companies won’t mind the transaction fees with the built-in advertising BUT, consumers LOVE their credit cards.” (That said, PayPal appears ready to work with credit-card companies in order to gain a foothold at physical checkouts.)
An additional wrinkle, of course, is Venmo depends on banks’ payment systems in order to function, so it might be hesitant about encroaching too much on their revenue streams. But if Venmo started getting a larger market share than the banks are comfortable with, would they try to do something about it? “That'd be a pretty dangerous and bold move,” Crone says. He adds that in some ways the banks actually don’t mind that services like Venmo have gotten bigger, because they have the banks processing payments that they wouldn’t have processed otherwise. “If they are not able to position themselves in the social sphere of payments,” he says, “then they'll still participate in the back-end plumbing."
After the announcement last month of Zelle’s impending rollout, a number of media outlets presented it as a direct competitor to Venmo. Reuters called it banks’ “answer” to Venmo. Engadget said that Zelle is “tak[ing] on” Venmo. Bloomberg went so far as to wonder if the app was a “Venmo killer.”
In truth, the dynamic between the two payment platforms will not be quite so oppositional; paper money and checks are still so prevalent that Zelle and Venmo could both gain immense popularity and still not run up against each other for many years. Crone thinks the most likely outcome is that the various companies involved with payments will end up cooperating as much as they compete. “There won’t be one mobile payment to rule them all,” he says. As much competition as there currently seems to be, the future that both Crone and Baker foresee for digital payments leaves plenty of room for emoji—and more ☮️ than ⚔, at that.