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Venmo saw exceptionally high fraud in Q1 (PYPL)

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PayPal-owned peer-to-peer app Venmo was reportedly hit by an atypically high rate of fraud in Q1 2018, causing it to shut down or pause some of its services, according to The Wall Street Journal, citing internal documents it reviewed.

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Venmo reported a $40 million operating loss in Q1 2018, which was nearly 40% higher than what it had budgeted for, due to an uptick in fraud, per The Journal. The Journal also found that Venmo’s transaction-loss rate, which includes losses related to fraudulent charges, increased from 0.25% of overall Venmo volume in January to 0.4% in March.

There are several ways fraud can occur through Venmo. For example, criminals could use stolen cards to make new Venmo profiles, or hackers could take over accounts of existing Venmo users and steal their money. However, it hasn’t been made clear what exactly caused Venmo’s Q1 spike in fraud.

Fraud isn’t a unique problem to Venmo — it’s a challenge across the entire P2P space. For instance, bank-based P2P-payments-platform Zelle saw some of its users experiencing fraud earlier this year. Hackers and con artists used the network to steal thousands in fraudulent transactions. Though Zelle has the advantage of being connected to banks, it’s still vulnerable to fraud, demonstrating a threat across the board for P2P players.

Venmo’s fraud predicament could impact the service’s perception and challenge its growth and development.

  • Venmo has already been facing scrutiny over privacy. PayPal executives were reportedly in talks earlier this year to eliminate Venmo’s public feed, potentially removing the ability for users to publicly post and view transactions on Venmo. This was fueled by ongoing concerns regarding Venmo’s privacy: PayPal agreed in February to change its disclosure on Venmo to more clearly tell users how to limit the sharing of transaction details, which marked a step toward transparency. But Venmo continued to face backlash from regulators and consumers regarding privacy and the information shared on its platform. Given the increasingly significant role that Venmo plays to PayPal’s top line, it’s important for Venmo to ensure security on its platform.
  • The uptick in fraud and subsequent losses reportedly caused Venmo to pause or discontinue several of its services. Venmo terminated features during Q1 2018, including features that are lucrative for the firm: It temporarily froze its instant-cash-out option and eliminated its web-based-transfer capability, which the firm said accounted for only 2% of overall volume but 15% of total net losses. Disabling these features could have helped the firm compensate for fraud losses. Additionally, the firm blacklisted tens of thousands of people that it found suspicious via an algorithm.

Venmo has been aggressively moving toward monetization by introducing features that allow users to use Venmo beyond P2P — but that could be threatened by rising fraud. P2P services are hard to monetize because providers often offer them for free, which leaves them at a loss. That’s been eating into PayPal’s take rate, which has been steadily declining for several quarters.

So Venmo’s made several moves in an attempt to monetize: It partnered with Grubhub, Uber, and 2 million other US retailers; became a payment option on Shopify, a platform provider for e-commerce companies; launched the Venmo debit card; and changed the fee structure for instant cash out — which processed more than $1 billion in volume in September — to a flat 1% fee.

And these efforts seem to be paying off: The firm said that 24% or Venmo users participate in a “monetizable” action, up from 13% in May, according to PayPal’s Q3 2018 earnings. These monetization strategies could help Venmo compensate for fraud losses — but only if customers use them.

And if the service is seen as untrustworthy due to pervasive fraud, usage could be hindered. Venmo, therefore, needs to make fraud detection and prevention a priority and should leverage its access to PayPal’s fraud-prevention solutions to do so.

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