Ryan P. Cleary
How Venmo's Change Impacts Financial Wellness
Updated: Aug 2, 2019
Venmo, a mobile payment service owned by PayPal, recently announced that it will be raising rates on instant transactions, starting in November. This has created consternation among customers, but the ramifications for employers have received less attention.
What is Venmo, and how is it used?
[Those already familiar with Venmo may desire to jump down to "The Disruptive Change"]
For those unfamiliar, Venmo is a mobile payment service which allows users to transmit funds to each other digitally, much like handing cash back and forth among a group of friends.
A quick history of Venmo
Venmo started in 2009 as the brainchild of Andrew Kortina and Iqram Magdon-Ismail, who met at the University of Pennsylvania. Kortina & Magdon-Ismail conceptualized Venmo as a "fee-free, digital way to ferry money between friends." Over the next few years, Venmo grew, driven partly by its unique social transaction stream complete with memos and emojis. By 2012, Venmo had over 3,000 active users, drawing the attention of then Braintree CEO, Bill Ready (at time of print, Bill serves as EVP & COO of PayPal).
Ready oversaw a $26 million acquisition of Venmo. In 2013, Paypal's President, David Marcus, acquired Braintree for $800 million as part of a larger strategy to catch up in the mobile market. Crucially, this acquisition included Venmo. Less than a year later, PayPal's revenue spiked to 6.6 billion (compared to only $8.3 billion marketplace sales for parent company, eBay), prompting a PayPal's spin-off as an independent company after a "lost decade" of growth. That lost opportunity to innovate, the rise of competitors, and need to produce revenues has helped drive Venmo's recent pricing changes.
Today, Venmo remains under PayPal, servicing a forecasted 22.9 million users in 2018, with heavy penetration among millennials (in early 2017, a survey found that more than 68% of millennials using mobile payments said Venmo was their preferred app).
How it works
Venmo's high-level functionality is simple and elegant. Users are able to link debit cards, credit cards, and bank accounts to fund transactions and place funds in their Venmo wallet. Because Venmo is a Peer-to-peer (P2P) platform, users are able to request or send funds internally through Venmo's network (similar to transferring funds between a savings and checking account at the same bank). When User A sends funds to User B, the funds are not automatically deposited in the recipient's (User B) bank account; this is critical to Venmo's business model. Instead, the funds are held directly by Venmo and User B receives "credit" to their Venmo wallet, similar to transferring funds to a bank account. If User B decides to send funds to User C, the credits on their Venmo wallet used first before transferring funds from User B's bank account. Alternatively, User B can choose to transfer funds from their Venmo wallet to their bank account in 1-3 business days or pay a small fee to have same-day transfer. Why does Venmo work this way?
It is all about cost
What casual readers may not know is that Venmo incurs costs every time they transfer funds to and from a bank account or card. In contrast, when a user has funds sitting in their Venmo wallet, Venmo incurs no costs to transfer funds to another Venmo wallet. This is because all funds in Venmo wallets are already being held by Venmo. To track transfers between wallets Venmo only needs to change values in a database-no money actually changes hands.
The disruptive change
Venmo recently made the decision to increase the rates on transferring funds from users' Venmo wallet to their bank account, instantly (30 minutes or less). Specifically, it raised rates from a flat $0.25 per instant transfer to a model charging 1% of the instant transfer, with a minimum fee of $0.25 and a maximum fee of $10. Standard transfers remain free...for now.
In addition, Venmo also continues to charge a 3% fee when users transfer funds using a credit card, though the fee is waived for debit cards.
Everyone should have seen it coming
For anyone following the finance or payments sector, this rate change should not come as a surprise-- Venmo has faced increasing competition from alternatives such as Zelle and Square; PayPal has come under increasing pressure to generate new profits, and Venmo offers a big opportunity: only 17% of users utilized a paid transaction in 2018.
How Does it Impact Employees?
Since Venmo announced the rate hikes there has been ample discussion around the why and how, but little discussion of the impact it will have on workers. While it is challenging to make any definitive assessment this soon after the change, we can make educated predictions.
More than 53% of employees report financial stress, with more than 71% living paycheck-to-paycheck. This means that more than 57% of employees lack sufficient funds to handle a $500 emergency expense, which 45% of employees reported facing in a 2017 survey. When the average car repair costs $357, a few unexpected expenses add up.
This constant financial stress is shown to impact employee health, with 75-90% of primary care doctor visits in 2014 driven by stress-related issues. This contributes to higher nearly double workplace absenteeism compared to that of non-distressed employees.
Venmo's decision to raise costs for instant fund transfers is unlikely to reduce this stress; with such low margins for error, a $5 transfer fee may not be an option for a distressed user borrowing funds from a friend or family member.
Increased transfer fees also pose risks to employee liquidity- the amount of cash they can easily access. If employees are waiting three business days to have funds transferred from their Venmo wallets, recovering from an emergency may take longer, incur additional costs, and force them to resort to other options, such as payday loans, over-drafted bank accounts, or high interest credit card debt.
The Employer Cost
Employers should be concerned- after all employees are the life-blood of a company. Employees under financial stress represent 140+ hours of lost productivity, to the tune of $8,000 in productivity loss. Stressed employees also raise healthcare costs, may lead to increased turnover, and can create friction if employees ask for their pay early.
Venmo offered an easy way for employees to reduce one aspect of financial stress instantly for a very low cost- with that reduced, employers ought to consider ways to help their employees. This can be as simple as offering a list of resources for employees to learn about finances. Employers could also go further and pursue development of financial wellness programs. By providing more comprehensive resources such as financial counseling, workshops, and early access to wages a company can recapture some of that lost productivity and ensure the well-being of their most important asset. Even better? It can be outsourced affordably! For example, FloatMe offers financial education, tools, and funds early access to employees' earnings on a digital app- all for only $1.25 per employee each month.
What's the Takeaway?
Venmo's decision to raise their transfer fees from a flat $0.25 to a 1% fee, while expected, is likely to negatively impact the liquidity and stress levels of employees. Employers can reduce the negative effects of this change by partnering with financial education programs, offering resources, or a comprehensive financial wellness platform like FloatMe.