The Wall Street Journal recently reported that Venmo sustained a transaction loss rate of 0.40% in March, up from 0.25% in January, according to internal PayPal documents they reviewed.
As reported in Digital Transactions:
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 indicated 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 Website. 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.
Shirley Inscoe, a senior analyst at Aite Group, a Boston-based financial-services consultancy, told Digital Transactions that all electronic payments are more or less vulnerable to fraud, but P2P payments tend to have the highest fraud rate. Venmo’s fraud spike could be the result of 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.
It’s a bad time for Venmo to take such a hit, since PayPal’s P2P service is free to users — and that means as Venmo grows, the absence of revenue will likely be a drag on PayPal’s so-called “take rate,” or the portion of each transaction the company keeps.
No payment channel is immune to fraud (check out all our blog posts on payments fraud) and checks are no different. In fact if you recall, PayPal withdrew their mobile RDC offering because of high fraud rates a few years ago. Financial institutions have come to realize the importance of fraud prevention technology to take on the fraudsters.
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