As Venmo and Square ramp up their P2P monetization strategies, bank deposits are at risk
October 3 2019
by Jordan McKee
As we discussed in a report earlier this year, P2P payment apps like Venmo and Square pose a growing threat to financial institutions. This threat is beginning to become more pronounced, extending beyond relationship disintermediation to revenue-generating activities like deposits and interchange. Our Connected Customer survey is designed to monitor trends such as this on a quarterly basis, providing a continuous pulse on consumer behavior. In this report, we share select P2P payment findings collected in our Q1 2019 survey that provide context on the growing challenge banks are up against.
The 451 Take
To date, many financial institutions have viewed Venmo and Square's Cash App as more nuisance than threat. Given recent moves by these players to monetize their platforms, it's time to start thinking otherwise. Our consumer survey shows that a substantial number of users of non-bank P2P payment services are storing a meaningful volume of funds in their apps instead of transferring them out to their bank account. This is resulting in deposit displacement for banks, putting key revenue sources such as lending, investing and even debit interchange at risk.
Venmo and Square's monetization strategies adversely impact bank deposits
P2P payment apps have risen significantly in popularity over the past decade – our most recent survey shows that 46% of consumers have used one to send or receive funds over the past 90 days. Concerningly for banks, many consumers – especially younger generations – are gravitating toward P2P services offered by non-bank providers. For instance, we find that more than two times as many Gen Z consumers are opting to use Venmo over their bank's app to make P2P transactions.
The traction of third-party P2P apps is a trend worth monitoring for financial institutions, especially as key players like Square and Venmo begin to ramp up their monetization strategies. Square, for example, has grown its Cash App business from virtually zero revenue three years ago to more than a $500m revenue run rate today (excluding bitcoin). The two primary revenue-generation tactics utilized by Square and Venmo are:
Payment cards. In May 2017, Square launched Cash Card, a physical payment card that draws on users' account balances, allowing for purchases at all Visa-accepting merchants and ATM cash withdrawals. In mid-2018, Venmo followed suit by announcing a similar Mastercard-branded card of its own, in addition to online acceptance via a branded 'pay button' with merchants like Abercrombie & Fitch, Hulu and Grubhub. The move into card issuance and consumer-to-business payments has enabled Square and Venmo to generate interchange revenue from merchants.
Instant deposits. Both Venmo and Square's Cash App allow users to transfer funds in real time to their bank accounts by leveraging the debit networks of Visa (Visa Direct) and Mastercard (Mastercard Send). Square charges 1.5% for each transfer while Venmo charges 1%. Aside from generating revenue (Venmo says its instant deposit service is currently its largest contributor of monetization), it can be argued that instant deposits give users greater confidence to store funds in their app balances, knowing they can quickly make a deposit back to their bank if necessary.
An immediate implication of these monetization moves is that users have a greater incentive and confidence to store funds in their Venmo and Cash App balance instead of transferring those funds to their bank account. We are seeing evidence of this trend in our consumer data. Consider that 18% of Gen Z consumers say they wait until their balance is high (e.g., over $100) before withdrawing/transferring to a bank account while an additional 15% say they continuously keep funds in the P2P balance. At the high end, more than one in five (22%) Gen X consumers say they continuously keep funds in their P2P balance.
It's worth emphasizing that the volume of funds sitting in P2P payment apps amounts to more than just a few dollars here and there. As shown in Figure 1, nearly two in five Millennials and almost half of $100,000+ income earners that use either Venmo, PayPal or Square's Cash App say they have more than $100 stored in their P2P app balances. Perhaps more strikingly, over one in four $100,000+ income owners have north of $500 stored and one in 10 have upwards of $1,000 stored.
The result of this phenomenon is the formation of multiple 'cash islands' that are expanding at the expense of bank deposits. Square, for example, says Cash App users already have more than $500m stored in their balances as of Q2 2019. The impact for financial institutions is significant – more funds stored in third-party P2P payment apps translates into less funds on hand for banks for fundamental, revenue-generating activities such as lending and investing.
Figure 1: Important customer demographics are most likely to store funds in their P2P app balance
451 Research's Connected Customer – Consumer Population Representative Survey, Q1 2019 (n = 484)