A presentation by Iqram Magdon-Ismail, Co-Founder, Venmo at the recent Digital Banking Conference was like a breath of fresh air after so many prepared speeches and canned demos. He was personable and amiable on stage and while he looked like he just rolled out of bed ten minutes ago, the story he shared about founding Venmo, the peer-to-peer mobile app that Iqram started in his apartment and processed $35 billion in payments in 2017.
.@Venmo was invented because co-founder Iqram Magdon-Ismail forgot his wallet on a weekend trip and annoyed his friend who floated him. #Venmo #DigBanking18 pic.twitter.com/dMoP6UniDk
— FINN Partners (@FINNPartners) June 7, 2018
According to Iqram, he had a bad habit of constantly forgetting his wallet and forcing his best friend ( and future co-founder) to front him cash when they went out. Iqram described the time that became the “aha” moment where he and his friend looked at each other and realized they had stumbled upon their killer startup idea.
Key principle of @Venmo is that it is a social payment app, doesn’t focus on money, but on the interactions between people –Iqram Magdon-Ismail, Co-Founder, Venmo #DigBanking18 pic.twitter.com/QyATm87Lgt
— Craig Iskowitz (@craigiskowitz) June 7, 2018
This is one of the primary differences between fintech startups and traditional financial services firms. Banks focus on money while fintechs focus on the user experience. The Venmo founders believed their app could facilitate interactions between people, rather than just sending money.
.@Venmo got burned by some users who made large transactions but didn’t have enough money in their bank account, but they ate the losses in exchange for a better user experience –Iqram Magdon-Ismail #DigBanking18 pic.twitter.com/xIMXZbrnzJ
— Craig Iskowitz (@craigiskowitz) June 7, 2018
When they first started, Venmo allowed people to send $3,000 – $5,000 per transaction, which was unheard of in money transfer industry. Traditional players measured solely on risk and denied them. Venmo saw it as a big advantage, especially in their core initial markets of New York and San Francisco, where monthly rents could easily be $5,000 or more. How would roommates splitting their rent be able to use be able to use Venmo if they blocked large transactions?
Since they have to send the money first and then try to withdraw from the sender’s account, there was a risk of not getting paid. But the Venmo founders judged the risk of loss was a fair price for the huge increase in users they saw because of it.
3 Rules for Startup Success: 1) Be in a space that is trending, 2) build a product you can use frequently with friends and 3) everyone in the world can use it. –Iqram Magdon-Ismail #DigBanking18 pic.twitter.com/dUIhDOlxH1
— Craig Iskowitz (@craigiskowitz) June 7, 2018
These were the three rules that Iqram and his co-founder used when evaluating ideas for their startup. They had tried a few other ideas such as one that allowed people to send money to their favorite bands who were playing live music.
The problem was that while the payments space is trending and they could use this product frequently with their friends, only people who were into live music would be interested in using it. So, it failed one of the rules.
1Q'18 was @venmo best quarter of net-user additions in its history & processed $12 billion in transaction, up 80% from a year earlier #DigBanking18 https://t.co/aLpPSctZpg pic.twitter.com/tNNxgHxVkl
— Craig Iskowitz (@craigiskowitz) June 7, 2018
While Venmo’s business is booming, it is trailing Zelle, the banking industry’s Venmo-killer app, in terms of transaction volume, although Venmo still has more users. However, this could change by the end of this year according to some analysts. Zelle is expected to grow more than 73% this year, and will likely reach 24.7 million US users. That’s more than Venmo’s 22.9 million users.
#payments data from @pennycrosman at #digbanking18 #fintech pic.twitter.com/RzxIccAVBW
— Dan Latimore (@DanLatimore) June 6, 2018
Venmo has an advantage with users that want a more social experience when sending money. Zelle is better for those who want their money to appear in their bank account fast. Zelle users see their accounts updated in a few minutes while Venmo users have to wait 1 to 3 business days. This doesn’t seem to be a negative for Venmo since their user requirements do not appear to overlap with what Zelle is offering. This is why both services can be growing at 70%+ annually. The P2P payment market is still green field.
Venmo users also are more engaged than users of other P2P payment systems. They send or receive payments four to five times per week, on average, and the vast majority of those are relatively small payments to friends. For comparison, PayPal users average one payment every 10 or 11 days, and they’re usually paying a merchant.
Because Venmo users are sending money more often, they are more likely to maintain a balance on the app. That’s great for Venmo’s owner, PayPal, since it generates some revenue to offset losses from Venmo’s free service. As Venmo’s merchant services scale, it should eventually increase transaction revenue as a percentage of total payment volume.
.@BankofAmerica processed 29 million #P2P payments, $9 billion in volume, 125% growth through @Zelle a bank-owned rival to and @PayPal. #DigBanking18 https://t.co/MQl7DgqWoB pic.twitter.com/F8yGJusSxr
— Craig Iskowitz (@craigiskowitz) June 7, 2018
This is the legacy providers doing the best to destroy the upstart innovators. While the big dogs can feed their own clients’ transactions through their pipes, they will never be able to innovate as fast as the smaller competitors like Venmo. They will also never be able to build a community of loyal users like Venmo, which makes their app sticky and reduces churn. Bank of America’s clients are ripe for poaching and it’s only a matter of time before their P2P volume plateaus.
The average #Zelle peer-to-peer transaction is $300 across the 100 participating banks -Penny Crosman #DigBanking18 pic.twitter.com/CCsw82y1xU
— Craig Iskowitz (@craigiskowitz) June 7, 2018
Venmo was more often used for smaller transactions, averaging about $60 — for things like splitting the restaurant bill, or collecting money from a roommate for the utility bill. I’m not sure that we can draw any conclusions from these different average transaction sizes. They may just be a function of the target demographic using each app. Rather than an indicator of one app being more popular than the other.
