Cash Is for Losers!

by / December 2, 2014

Kristen Geil, a writer for an Internet marketing firm in Chicago, heard about Venmo for the first time two summers ago. Her new roommate, who had just arrived in town from New York, was raving about this app that allows users to send and receive payments over their smartphones. There was also a social media component to the app that made the mundane act of splitting bills kind of fun. She assured Geil that it was safe and reliable. Plus, there was no waiting around for checks to clear and no trudging to an ATM for cash. Geil agreed to give it a try.

After downloading Venmo onto her iPhone, she hooked it up to her bank account, synced it with her existing network of contacts from Facebook (FB), and got started. The sign-up was easy, the interface clean and intuitive. “I was a little nervous at first,” says Geil, 25. “The idea of exchanging money via a mobile app seemed kind of sketchy.”


Geil now hops on Venmo several times a week. The app allows the user to hang on to a balance in her digital wallet and, at any time, cash it out to her bank account. Geil typically keeps a small amount of money in her Venmo wallet, which she uses to settle debts with friends for restaurant checks, bar tabs, gas station charges, wedding gifts, and all the other money-changing situations she finds herself in, which, as a twentysomething who hangs out with friends whenever possible, is a lot. Venmo doesn’t cost her anything unless she uses a credit card, which she never does. “The only reason I even have checks now is to pay my rent,” she says.

Venmo also doubles, by design, as a social network. Every time a user makes a payment to a friend, he has to fill out a field summarizing what the reimbursement is for. The transaction, stripped of the specific dollar amount, is then shared with both parties’ networks of friends. For example: “John Doe paid Bob Smith” for “fantasy football domination.” You can adjust the settings so your transactions are private, but most users don’t. Part of the Venmo experience is the continuous scroll of your friends’ microeconomic activity as told through droll synopsis, inside jokes, and emoji. Such is the avant-garde of home economics circa 2014.

“I wouldn’t scroll through Venmo just for kicks,” Geil says. “But when I’m there, making a charge or a pay request, I like to check out what’s going on. People are kind of entertaining. Everyone wants to be creative and sarcastic. It can be pretty funny.”

Venmo’s headquarters is in New York and is run by a group of self-described “fun-loving oddballs.” Since starting in 2009, Venmo’s mash-up of personal finance and social media has proven especially compelling to college kids and urban professionals age 30 and younger. The app first took off primarily in large coastal cities such as New York and San Francisco and is now sweeping, smartphone by smartphone, across the rest of the country. Venmo executives decline to disclose how many individuals are using the product, but transaction volume on Venmo is growing fast. In the third quarter of 2014, the company says, it processed $700 million in payments, up from $141 million a year earlier.

Along with a select handful of other apps, Venmo has inserted itself into the daily rhythms of millennials. It’s a cycle that might begin with a bunch of buddies summoning a car from Uber to get to a party, cranking up some music from Spotify once they’ve arrived, firing off a few goofy messages on Snapchat to lure other revelers, taking some shots on Instagram to document the mayhem, and finally, the next morning, sending some emoji-riddled payments on Venmo to settle debts and to get in one last punch line about the previous night’s transgressions. The app is highly communicable. If you cover the cost of dinner for your 26-year-old cousin, good luck getting it back without signing up for Venmo. “Instead of someone saying to another person, ‘Send me some money,’ they’re saying, ‘Venmo me,’ ” says Jordan McKee, a senior analyst at tech consulting firm Yankee Group. “Any time your brand becomes a verb, you’ve made a pretty profound impact.”

Futurists and currency buffs have been predicting for years that some digital gadget or other would kill off cash, credit cards, and checkbooks. That process is already far along outside the U.S. Scandinavians were using pay-by-text-message vending machines by 2000, long before most Americans had even heard of text messages. In Kenya, the mobile currency system M-Pesa is a ubiquitous tool. But after years of consumer indifference, mobile payments are about to make the leap in the U.S. from foreign-sounding novelty to inescapable fact of daily life. In a study in 2013, Forrester Research (FORR) estimated that the amount of money spent by Americans via mobile payments will reach $90 billion in 2017, compared with $12.8 billion two years ago. Over the next several years, “mobile payments will move toward the mainstream,” Forrester analysts wrote.

Wherever consumers go, merchants are likely to follow—particularly when clear-cut consumer preferences emerge. At the moment, the battle over mobile payments is far from settled, with startups, banks, credit card companies, and tech giants all fighting for a piece of the action. A recent search of AngelList, a site that tracks early-stage investment in companies, reveals that there are now at least 1,475 digital-payments-related startups. Whichever companies lure the most consumers and merchants onto their product stand to reap billions of dollars in transaction fees while also accumulating deep treasure-troves of valuable data about purchase habits. In October, Apple (AAPL) jumped into the arena, rolling out Apple Pay, a system that allows people to make store purchases with a fingertip reader on their iPhones. Facebook (FB) is expected to join the fray as well. On Nov. 17, Snapchat introduced a tool called Snapcash that allows users to send each other money through the popular ephemeral messaging app.

In its current iteration, Venmo is basically a next-generation checking account. Users have the option of depositing a payment directly into their connected bank account, or save a step and just leave a balance on the app. The more people do the latter, the greater the threat Venmo is to traditional retail banking. If Venmo’s expansion into store payments is as successful as it’s been with peer-to-peer, companies like Square that make point-of-sale card readers have reason to worry.

Venmo brings a sizable posse to this fight. In 2012, Braintree, a business in Chicago that specializes in mobile and Web payment systems for e-commerce companies, acquired Venmo for $26.2 million. Last year, EBay’s (EBAY) PayPal bought Braintree for $800 million. That has put Venmo, the indie contender, under the same corporate umbrella as PayPal, the aging payments champion of the Web. In September, EBay announced it will spin off its entire payments division, including PayPal, Braintree, and Venmo, into a publicly traded company. The spinoff is expected to take place next year.

Company executives declined to share specific information about Venmo’s financial performance. Presumably that’s for the usual reason startups are mum regarding revenue: There’s very little of it to discuss. In a spring earnings call, EBay’s chief executive officer, John Donahoe, revealed that as of April 29 Venmo’s peer-to-peer business didn’t have any revenue. The app is free to download. It’s free to receive payments on Venmo. And it’s free to send money, as long as the user is paying from a bank account, debit card, or Venmo wallet. Customers who make payments via credit card accounts have to cover the 3 percent transaction fee.

Bill Ready, the CEO of Braintree and Venmo, says Venmo is an easy first step to get consumers accustomed to mobile payments. Much easier, he says, than training people to swipe their phones at cash registers in stores. “It’s a great way to get consumers comfortable with using their phone to pay,” he says. “Then as they become comfortable with that use, they can start to try others. This is the first step to cross the chasm.”

Venmo was founded by two friends, Andrew Kortina and Iqram Magdon-Ismail, both 31. At a time when founders of tech startups are typically bestowed with a reverence once reserved for Apollo astronauts, Kortina and Magdon-Ismail remain largely unknown, and they and their minders at PayPal seem to prefer it that way. Through a spokesperson, both declined to be interviewed for this article. In September, Bank Innovation, an industry trade website, reported that the co-founders had recently stepped down from day-to-day operations at Venmo. A Venmo spokesperson denies the report. When contacted directly for clarification about his role at the company, Magdon-Ismail responded via Facebook that he continues “to work alongside Bill and the team at Venmo to grow and scale the company.” Kortina said via e-mail that Venmo remains his “primary professional focus, and I’m actively helping develop new product strategy, figuring out how Venmo fits into the broader PayPal landscape, and working on scaling the organization.”

Venmo happened because of a forgotten wallet. In the spring of 2009, Magdon-Ismail traveled from Philadelphia where he was working at a startup to New York City to hang out with his college buddy Kortina. According to a history of the company that Kortina would later post on his personal website, when Magdon-Ismail arrived in New York, he realized he’d left his wallet at home. By the end of the weekend, he owed Kortina $200. The process of settling up got the friends talking about how annoying it was to write and deposit checks. It would be a lot easier, they agreed, if they could just send each other money on their phones.

Paying for things via mobile devices was hardly a new idea. In 1998 the founders of PayPal originally envisioned the business as a secure way for PalmPilot users to send money to one another. PayPal soon shifted gears, created a system for Web payments, went public, and sold itself to EBay in 2002 for $1.5 billion. Seven years later, the niche of peer-to-peer mobile payments was still largely unconquered.

Magdon-Ismail and Kortina had met as freshman roommates at the University of Pennsylvania. They were both good with computers, shared an entrepreneurial streak, and went on to start a series of businesses together, including a college classified site called My Campus Post, an analytics tool (Swooge), and a music-selling platform (Philafunk). All are defunct.

After Magdon-Ismail’s walletless weekend in New York, the pair decided to take another shot at a startup. In the weeks that followed they cobbled together a rudimentary system that allowed them to send money back and forth between their BlackBerrys via text message, along with a brief written summary of what the payment was for. In a brainstorming session, they came up with the “ven” from vendere, the Latin word for to sell, and “mo” from mobile. By the spring of 2010, they had a working prototype and raised $1 million in venture capital. They quit their day jobs at technology startups and got to work on Venmo full time. The new company’s tag line: “It’s like your phone and your wallet had a beautiful baby.”

One of their key decisions, the co-founders would later explain at tech conferences, was to move the system off text messages and onto mobile apps. Along the way, they also decided to make Venmo more social by steering everybody’s jokey payment summaries into public “newsfeeds.” The scroll of payments, they found, increased user engagement.

In 2011, Venmo raised an additional $5 million—and soon had its first major crisis. From the beginning, all a new Venmo user had to do to get started was download the app onto a smartphone, tap in a valid credit card number, and start sending and receiving payments for free. Every time the user paid a friend, the credit card company charged Venmo a 3 percent transaction fee.

At first, the Venmo co-founders rationalized the fees as a loss leader while the service got off the ground. But volume soared, the company hemorrhaged money, and, as Magdon-Ismail would later recount in a 2013 speech at MIT, the situation grew dire in a hurry. For most startups, he explained, a $5 million round should last two or three years. During one six-month stretch, Venmo burned through almost half of its $5 million in processing fees alone. Venmo’s board met and agreed to take emergency action.

After some frantic reengineering, Venmo announced that users who linked their Venmo payments to their bank accounts or debit cards could continue making Venmo payments for free. Those who continued to rely on their credit cards, however, would have to cover the transaction fees. “When we did that, all our amazing growth plummeted,” Magdon-Ismail said. “We had meeting after meeting, trying to decide what we were going to do next. It was almost as if, we thought, people were just using Venmo because they wanted to get free credit card points.”

With cash running low, the co-founders set out to raise another round of venture capital. This time there were no takers. Toward the end of the summer of 2012, with desperation running high, the co-founders met with Ready, the CEO of Braintree. Prior to joining Braintree, Ready had invested in Venmo while working as a venture capitalist at Accel Partners. He knew the product and said the two companies would be complementary. In August, Braintree acquired Venmo. Although the $26.2 million deal was a fraction of what some other social-network-flavored startups were getting—Instagram got $1 billion from Facebook, Twitch got $970 million from (AMZN), Tumblr got $1.1 billion from Yahoo! (YHOO)—the co-founders were relieved. “Basically, Braintree saved Venmo’s life,” Magdon-Ismail said at MIT.

On a recent visit to Venmo’s headquarters in Manhattan, Magdon-Ismail and Kortina are nowhere to be seen. Casually dressed members of Venmo’s growing staff mill about. The space is standard startup chic—communal dining room, clusters of adjustable standing desks, and quirkily named conference rooms. Venmo’s naming shtick: people whose pictures appear on U.S. currency.

Sitting in the Lincoln Room, Michael Vaughan, Venmo’s general manager, says full-time head count is up to about 70. For much of its administrative needs—human resources, legal, finance—the operation leans on its parent companies. Vaughan says Venmo’s team is “very product-focused.”

“When you’re dealing with people’s money, the sensitivity is escalated dramatically vs. posting pictures and comments,” he says. “We never lose sight of the fact that people are trusting us with their money. That’s got to work every time exactly as expected.”

Venmo has mostly relied on word of mouth, peer pressure, and the occasional $5 promotional giveaways to attract users. Last year, after meeting with ad agencies and rejecting their various ideas, the co-founders conjured up an ad campaign. Over a meal at the Breslin, a restaurant popular with New York’s tech community, they persuaded a newly hired software engineer, Lucas Chi, to serve as the public face of the brand. The subsequent ads, which ran in the New York City subway system, featured the engineer’s expressionless, mustachioed face, accompanied by laconic phrases about his activities. “Lucas Wears Jeans.” “Lucas Crosses the Street.” “Lucas Uses Venmo.”

The campaign was essentially Dick and Jane reinvented for modern ironists. The subtly conveyed idea: Consumers should feel no more hesitant about making payments over their smartphones than toddlers should feel hesitant about bouncing a ball. Although the campaign was a hit, inspiring much nattering and meme making on social media, Vaughan says the company is done advertising. “We like the organic way that Venmo is growing,” he says. “So that’s what we’re sticking with for now.”

Unlike Snapchat, Instagram, and pretty much every other fast-growing mobile app these days that builds up a huge audience before getting much revenue, Venmo has no plans to introduce ads into its social stream. “People ask us about that all the time,” says Ready. “We have a great avenue to monetization without having to do advertising, which is very different than a lot of other social apps.”

The way Venmo will make its money, Ready explains, is not by charging consumers for transactions but by charging merchants. For years, Braintree has been focused on building a system designed to make it easier for new startups to accept and process mobile and Web payments from customers. The company has scooped up as paying clients many of the fast-growing, app-driven startups in the sharing economy, including Airbnb, Uber, and TaskRabbit. Braintree handles transactions in whatever way consumers choose to pay, whether it’s credit cards, Bitcoin, PayPal, Apple Pay, Google Wallet (GOOG), or Venmo. “Our role is to give developers and merchants really easy access to all the payment tools that are going to be relevant and useful to them,” Ready says. “The mobile checkout is going to have multiple options. There won’t be a hundred of these things. Every tech company is going to want to work with the few that matter.”

In theory, the more people who use Venmo, the more incentive merchants will have to accept it at checkout. In August, Braintree rolled out a payment option for merchants called One Touch, which allows people shopping on their smartphones to pay participating merchants directly from a Venmo or PayPal wallet without having to reenter any information. “Wallets have existed on the Internet for almost 15 years,” Ready says. “But we’ve always believed that wallets would be much more important in the mobile world, because people aren’t going to be happy rekeying their information over and over again.”

Rytis Vitkauskas is the founder and CEO of YPlan, a startup that allows smartphone users in various cities—including London, Las Vegas, San Francisco, and New York—to peruse a curated list of events going on each evening and to buy tickets at the last minute. YPlan recently added One Touch as a payment option for its customers. Vitkauskas says he likes One Touch because it significantly decreases the amount of effort needed for customers to check out, which, in turn, increases the likelihood that they’ll complete a purchase. It’s also appealing, he says, because among mobile app users, Venmo is already a trusted brand, which can make first-time users feel more at ease in a new mobile environment. “We launched One Touch two or three weeks ago, so it’s still early days,” Vitkauskas says. “Even so, we’ve seen strong customer uptake.”

Merchants such as YPlan pay a transaction fee every time a Venmo user completes a purchase using One Touch. The more money being spent over smartphones, the more Venmo stands to benefit, particularly if it can stick to the consumer as he hops around from app to app on his smartphone. “I don’t think Braintree sees a future of charging for peer-to-peer payments,” says analyst McKee of Yankee Group. The real value, he says, is getting the debit cards on file to have leverage with merchants.

Eric Jackson, a former PayPal executive who played a crucial role in the company’s early days, says Venmo’s growing popularity among mobile consumers should be “hugely valuable” to PayPal down the road. “It’s good they fell into PayPal’s lap,” says Jackson, who penned the book The PayPal Wars and is now the co-founder and CEO of CapLinked, a financial tech startup in Southern California. “I don’t think PayPal could have done this. They’ve struggled in terms of innovation. They’re trying to find a way to regain that mojo, which is a big reason for the spinoff.”

The key for PayPal, Jackson says, is to avoid doing to Venmo what EBay did to PayPal: impose its culture and effectively chase away talent. “Product independence is key,” he says. “The way they’ve been doing it is working. So why change it? I would set the expectation early on during the spinoff process that Venmo is sacrosanct. Keep them squirreled away.” Anuj Nayar, senior director of global initiative at PayPal, says EBay’s acquisition of PayPal was one of the most successful in Silicon Valley history. “We grew at an incredible rate after that in a way that PayPal as an independent company wouldn’t have been able to,” he says. “Why would we change something that is doing so well and is loved so much by its customers?”

In June, during a panel discussion at the Northside Festival, an innovation conference in Brooklyn, N.Y., Venmo’s Magdon-Ismail gave his assessment of how the mobile payments field is shaking out. “We’ve got two competitors,” he said. “Facebook and cash.”

A few days earlier, Facebook had hired away PayPal’s then president, David Marcus, to run Facebook’s Messenger unit. The move touched off widespread speculation that Facebook will eventually jump into peer-to-peer payments. Ready says he’s not losing sleep over that prospect. “Even in the short life of Venmo, there have already been a few new competitors where people said, ‘Oh my God, that’s a Venmo killer,’ ” he says. “Not only did we survive, but we’re growing faster than ever.”

By Felix Gillette via Bloomberg Business Week

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