PayPal Holdings Inc. has been trying to make money off of its highly popular but free peer-to-peer payments service, Venmo, but over the weekend a report emerged indicating a surge in fraud could have complicated that effort.
Venmo sustained a transaction loss rate of 0.40% in March, up from 0.25% in January, according to internal PayPal documents reviewed by The Wall Street Journal. The company had been expecting a loss rate of about 0.24% over the quarter, the paper reported. The transaction loss rate includes fraud losses.
The losses sent Venmo’s first-quarter operating loss to approximately $40 million, a 40% increase over what PayPal had expected, the documents revealed. Internal email messages seen by the Journal indicate concerns at PayPal that Venmo’s losses might cause the company to miss its first-quarter earnings estimate.
It is unclear whether higher-than-expected loss rates continued through the months since March. PayPal did not respond to a request for comment from Digital Transactions News. An analyst note released Monday by Keefe, Bruyette & Woods says “losses have declined since then and management has indicated that the loss levels at Venmo are lower than overall [PayPal] average.”
The company adopted several measures to get fraud under control, including a temporary suspension on instant transfers to bank accounts, a so-called blacklisting of users deemed by algorithms to be high-risk, and a decision to stop allowing transfers through the Venmo Web site. Earlier this month, Venmo increased its fee for instant transfers to a bank account, moving it from a flat 25 cents to 1% of the amount with a 25-cent minimum.
While all electronic payments are more or less vulnerable to fraud, “P2P payments tend to have the highest fraud rate,” says Shirley Inscoe, a senior analyst at Aite Group, a Boston-based financial-services consultancy, in an email message. In the case of Venmo’s fraud spike, there could be several culprits, she says, including ongoing data breaches, which give criminals the ability to register for services with stolen credentials.
“Financial institutions are also grappling with account-takeover fraud, and a fraudster who successfully gains access to an account can drain the funds quickly using Venmo transfers,” she says. “False registrations (or application fraud) and account takeovers are the two more significant challenges financial institutions face in the current market, and will continue to be until technology improvements are implemented to more reliably authenticate consumers.”
Such threats are not exclusive to Venmo, Inscoe points out. “Zelle and other P2P payment vehicles are subject to similar types of fraud,” she says. “Under Zelle’s operating rules, every financial institution can set their own transaction limits, thus limiting exposure to fraud.” Zelle is a P2P service launched last year by the nation’s biggest banks.
The fraud issue could not have come at a more sensitive time for Venmo. The P2P service’s fast-rising volume has proven to be both a boon and a problem for PayPal, since the P2P service is free to users. As Venmo grows, that absence of revenue tends to be a drag on PayPal’s so-called take rate, or the portion of each transaction the company keeps. In October, PayPal reported Venmo’s third-quarter volume hit $16.7 billion, up 18% from the second quarter and 78% year-over-year. The company said Venmo’s current run rate indicated annual volume of $70 billion.
To start generating revenue, PayPal has launched programs that allow online merchants to accept Venmo. It has also introduced a cobranded Visa card to do the same for physical sellers. So far, some 2 million merchants have agreed to accept Venmo, PayPal said last month. And e-commerce platforms like BigCommerce Pty Ltd. have agreed to support Venmo transactions.
Overall, some 24% of users have performed what PayPal calls a “monetizable transaction,” up from 17% in July and 13% in May.