Venmo, Apple and Samsung


The irony of mobile financial businesses - Start-ups beat big tech and financial giants
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1. The irony of online financial businesses

The online financial industry can be divided into four fields of business.

  1. Online banking: Online banking, also known as internet banking or e-banking, allows online customers to make financial transactions previously available only at offline banks. The banks reduce rent and labor-related costs while offering clients additional perks (e.g. low remittance fees, higher interest rates)
  2. E-payments: E-payment websites and apps support online money transfers without traditional cash/card methods.
  3. P2P lending: Peer-to-peer (P2P) lending is the practice of lending money to individuals or businesses through online services that match lenders to borrowers. They run with lower [1] overhead and provide transaction services at lower costs compared to financial institutions.
  4. Mobile payments: Mobile payment services eliminate the need to access ATMs and the hassles of online banking. They allow customers to transfer and receive money efficiently at extremely low rates.

Of these, online banking and E-payments require customers to invest a minimum amount before being able to use the services. As a result, the market has been oriented to favor large, established banks and businesses.

  • E-banks:In the US, Charles Schwab, American Express, and Discover are among the largest e-banks. In Japan, Sony, Rakuten, SBI Holding, Sumitomo Mitsui, and MUFG are the largest.
  • E-payment:Apple (Apple Pay), Google (Google Wallet), and Samsung Electronics (Samsung Pay) are a few of the world’s largest companies offering OS-based e-payment services.

On the other hand, many of the biggest P2P lending and mobile payment companies began as start-ups.

  • P2P: Lending Club, Prosper, SoFi, and other start-ups dominate the US P2P lending market.
  • Mobile payment: Venmo was founded by two entrepreneurs who sold the company to PayPal in 2013. Venmo is the leading company in the mobile payment market.

It is worth noting that small to medium sized companies, like those in the P2P lending and mobile payment industries, are expanding faster in the online financial market than large corporations.

  • In the United States, it is not uncommon to hear people use “Venmo” as a verb that means “make an e-transfer.”
  • The P2P lending market crossed the $1B mark in loans in 2014 and continues to grow by 40% each quarter.
  • Although the number of stores accepting e-payments via Apple Pay or Samsung Pay is rising, most consumers still abide by traditional payment methods (e.g. cash, credit cards, checking accounts).
  • Banks are still heavily dependent on their robust offline divisions, which allow customers to make payments abroad, take out loans, change currency, purchase bonds, etc.

Of these four areas, we will delve deeper into the structures of the mobile payment and e-payment markets, and we will analyze what lies at the core of these industries.

2. Venmo: the pioneer of the mobile payment service industry

Venmo is a mobile payment service owned by PayPal which allows users to transfer money between one another using a mobile phone app.

  • You start by downloading the Venmo app. Once you sign up, you are given a Venmo account.
  • You can link your Venmo account to your bank account(s), debit card(s), and credit card(s).
  • You can easily find a friend’s Venmo account because the app is linked to your contact list, email address, Venmo user ID, as well as social media accounts like Facebook.
  • Users can transfer money through Venmo with a few simple clicks. The app is straightforward and easy to use and does not require knowledge of others’ account numbers.
  • Users can also request money from one or more friends, facilitating split payments for, say, a dinner bill.
  • Paying with a bank account or debit card is free, but credit cards have a 3% fee for each transaction.
  • There is a social aspect to Venmo. A public [2] feed lists your friends’ transfers and for what purpose the transfers were made.

Venmo was founded by two friends, Andrew Kortina and Iqram Magdon-Ismail, who met as freshman roommates at the University of Pennsylvania. PayPal purchased the service in 2013.

  • Magdon-Ismail and Kortina were freshman roommates at UPenn, an Ivy League school.
  • The idea of Venmo originated when Magdon-Ismail forgot his wallet during a trip to visit Kortina. The process of settling their accounts was cumbersome but inspired the two to develop a service that would make money transfers easier.
  • The two received $1M from a VC firm in 2010, and they began working full-time on Venmo. In 2011, they succeeded in raising another $5M.
  • However, as the number of users began to soar, the cost of running the service also rapidly increased. In just 6 months, Venmo had expended $2.5M of its investment funds.
  • Braintree acquired Venmo for $26.2M in 2012. PayPal later acquired Braintree for $800M in 2013.
  • With Paypal’s acquisition, Venmo had enough money to make vast improvements to its services. The company strengthened its security measures, modified the app’s UX/UI and functionality, and by targeting PayPal’s existing customers, Venmo spread like wildfire through [3] captive marketing practices.

Venmo has outpaced JP Morgan, Bank of America, and other major banks in the mobile payment market. It is continuing to grow today.

  • In Q2 of 2016, Venmo handled $4B in transactions – a 140% increase from Q2 of 2015.
  • In Q3 of 2016, Venmo handled $5B in transactions – a 25% increase from the previous quarter.
  • In Q3 of 2016, 29% of all transactions in PayPal were made through Venmo.
  • The amount that people transfer and request on Venmo average about $2/transaction. Each quarter, Venmo handles roughly $2.5B. (JP Morgan Chase’s QuickPay handled $20B in 2015, but transactions averaged at about $300, indicating a much lower number of users)
  • 80% of Venmo’s users are millennials. They use the app mostly to pay or receive costs of buying food and beverage items.

The reason Venmo has been so successful is because the quality of its services far exceeds those of large banks at a fraction of the price.

  • Problems with existing services: The smartphone apps of banks are poorly designed, offer too many functions (e.g. viewing account details, inquiries about loans), and are too complicated to make simple transactions. Transfers require users to know the account information of recipients, and there are hassles associated with extraneous fees. All in all, these apps have been difficult to use and frustrate many customers.
  • Venmo’s solution: The Venmo app has a clean design and is easy to use. An additional benefit is that transactions are possible as long as users know the recipient’s email address, phone number, or social media account. An additional bonus is that Venmo is free to use.

Venmo’s weaknesses include its inability to expand globally and the fact that its profit model operates at a deficit. However, the company has been using foreign investments and profit model restructuring to overcome these obstacles.

  • Every country has a strict set of rules to protect its financial institutions, and this makes Venmo’s international expansion a nearly impossible endeavor.
  • Until the end of 2016, Venmo was not generating any revenue. Meanwhile, the costs of maintaining a reliable payment platform without charging users a fee was hurting the company’s profit margins.
  • Solution 1: PayPal has been investing in similar services abroad (e.g. Korea’s Toss).
  • Solution 2: Venmo has expanded such that payments can be made not just between individuals, but also to stores and businesses (e.g. to buy tickets or smartphone games). These affiliated businesses pay a fee to use Venmo.

3. Google, Apple, and Samsung struggle to find their place in the e-payment industry.

The e-payment industry has been a bloody battlefield for Apple, Google, Samsung, and other major IT companies.

  • Apple’s market share in the e-payment market has grown to 50% since its release of Apple Pay in 2014.
  • Samsung acquired LoopPay (a company that has had a wider coverage of businesses than Apple Pay) in an effort to catch up to Apple.
  • Google acquired Softcard and launched Google Wallet.

An advantage that these three companies share is that they allow users to make offline purchases with the same cards they use for e-payments.

  • Convenience: All you need to do to activate this service is to enter your credit or debit card details into your smartphone.
  • Rewards: Customers receive promotion notifications and benefits in real-time.
  • Management: You can easily manage your reward points.

Unfortunately, American consumers have not been very enthusiastic about using the three companies’ e-payment services, and they continue to use cash or physical cards to carry out transactions.

  • Making payments the traditional way has not been problematic: Most Americans do not feel the need to use the e-payment services because traditional methods were not inconvenient to start with.
  • The usefulness of e-payments is limited: There are no added benefits to using e-payment services besides the elimination of the need to carry around cash or a wallet.
  • Concerns about e-payments: If a user loses her phone, her bank account and card information may be leaked. Google, Samsung, and Apple may also misuse or leak the details of your transactions.

Because of these issues, the number of users and transactions remains low in the e-payment market.

4. Korea’s online financial businesses

We observe similar phenomena among Korea’s online financial businesses.

  • Korea’s payment start-up Toss is growing quickly (PayPal has invested in Toss).
  • Despite regulatory pressure from the government, P2P lending start-ups like Lend It and 8% are experiencing rapid growth.
  • On the other hand, there has not been much progress in the online banking industry, which is dominated by Samsung, Kakao, and NAVER.

The services that ultimately succeed in the online finance market are those that offer solutions for customers’ problems rather than those that spend a lot of money on developing fancy platforms.

  • Venmo and Toss are both apps that are time-saving, inexpensive, and easy to use.
  • E-payment and online banking services have not been successful in creating products that customers massively benefit from.

What is the future of the online finance industry? Will Venmo become as influential as Google, Apple, and Amazon in the future? How should those in the e-payment industry address the issues we see?

Please discuss this topic with your Ringle Tutor, who is likely familiar with Venmo, and take the time to improve your spoken English.

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