Fintech Firms Look to Revolutionize Finance

“Do you want to just Venmo me?” is a phrase often heard when the check comes at a restaurant for millennials, specifically those in college. Venmo is a new Fintech app that allows users hook up the app to their bank account and send specific amounts of money to other Venmo users. The app is becoming so well known in some areas of the country that its title is often used as a verb, just how Uber’s name is when people say “let’s Uber there”. 
 
Apps such as Venmo are revolutionizing and growing the financial technology industry. Start-ups are changing all aspects of finance from online payments to buying stock on the stock exchange. The new influx of fintech apps provides young people more financial opportunities by making it easier to gain financial knowledge and access the stock market and investment tools.
    
Venmo is one of the fastest growing and well-known fintech apps throughout the country. Braintree first acquired the mobile payment app in 2012 for $26.2 million, and, just one year later, Paypal bought Braintree for $800 million. Currently, Venmo is a part of Paypal’s large portfolio, and is rapidly growing in recognition and use (1). The app is especially popular among millennials, as it allows customers to quickly transfer money between other users. One of the biggest uses is splitting restaurant and bar checks, instead of enduring the struggle of splitting a check among multiple credit cards, or exchanging cash among friends. The best part, and the primary reason for its popularity among young people, is that there are no fees. This means that someone can make as many transfers as they want without worrying about small hidden fees that can add up. This makes Venmo even more attractive than just using cash, as, unless it your bank’s ATM, withdrawing cash also includes fees. 
    
Although Venmo is growing and creating quite a name for itself, the app is a very small portion of Paypal. The most attractive aspect of Venmo is that there are no transfer or subscription fees; however, this also means that Paypal is making very little to no money off of the popular app. Currently, Venmo only makes up about 3% of Paypal’s total volume, meaning that whatever a customer transfers to another user goes into the volume count. 
    
Also, the only revenue stream for Paypal from Venmo is when customers use their credit cards on their accounts, but that is very small margin (2). Paypal will have to find a way to monetize Venmo without losing their customer base that does not wish to pay fees. 
    
One possible option that Paypal is exploring is Venmo Pay—a feature that will allow merchants to accept Venmo payments from consumers. The merchant would be charged around 3% of the total purchase, similar to a credit card transaction (3). This idea is similar to Apple Pay and is a sign of increased competition in mobile transactions between customers and merchants. 
    
Another possibility is for Venmo to stay in the person-to-person arena, but to move upstream, meaning to monetize at larger amounts of transfers. This would be difficult to attract customers that are doing large person-to-person transactions because of where Venmo currently sits in the market. Moving upstream means having to directly compete with large banks, and that may produce a difficult fight to attract non-millennials. 
    
Another Fintech firm that is attracting a new generation to financial management is the stock trading app RobinHood. This app allows users to invest in the stock market and does not charge them a commission fee on any trades. Within a year of release, RobinHood boasted hundred of thousands of users, over $1 billion in trades, and $66 million in funding (4). Instead of large firms charging per trade, RobinHood does not deter users from making trades because of steep trading fees. This encourages younger investors with smaller portfolios to invest, as many are normally dissuaded from investing because an account with only a few hundred dollars will gain such a small yield if the account costs money or the takes a trading fee. In addition, the simplicity of the app makes it much more attractive than the apps from larger firm, such as E*trade or ScottTrade, that feature more complex mobile applications in addition to trading fees. 
    
RobinHood already indicated its influence in the global economy with its younger user base after the Brexit vote. After the vote, the DowJones dropped more than 600 points; however, younger millennial investors bought much more than they sold. RobinHood’s average user is 28, and their users had 2.5 buys for every sell after the Brexit vote. This behavior indicates that younger investors are more than willing to invest, especially in downturns, when there are no fees (5). 
    
The app prides itself on keeping current information on stock markets while maintaining the app’s simplicity, making it easier for the young investor to decipher information. Additionally, Robinhood is already profitable and has an easier road to monetization than other Fintech apps, such as Venmo. The app earns interest off money stored in the app and is also testing a feature that allows customers to trade on the margin, in which RobinHood charges a 3.5% fee (4). 
    
Overall, RobinHood is the first to provide free trading on a mobile app and are educating younger investors along the way. This allows RobinHood to appeal to a younger demographic in an industry that tends to focus on the middle-aged adult. 
    
Of course with any growing industry, there will those who fail either through poor implementation, stagnation, or, in LendingClub’s case, a lack of regulation. LendingClub is an online website that connects lenders and borrowers directly without the use of a bank.  The lack of oversight and regulation from the removal of the middle man lead LendingClub into very hot water. Currently, LendingClub is under investigation by the Department of Justice and New York’s bank regulators for allegations claiming employees intentionally altered loan applications to make them more appealing to investors (6). 
    
Many Fintech companies, such as LendingClub, do not hold money so they have less regulation; however, LendingClub may be a good indication that more regulation is coming of the Fintech industry. Person-to-person loan companies are not under the same regulations as banks, so they are not required to keep cash on hand. If a significant number of lenders take their money out, there could be a cash problem. In the future, Fintech firms will undoubtedly face increased regulation from Washington, as the Fed is wary of under regulated financial firms causing economic downturns. 
    
Although not every fintech firm will be successful and increased regulation is on the horizon, the Fintech industry does have a positive future. Fintech firms are building apps that are making investing much more accessible to lower income and younger investors. Furthermore, paying bills will become easier, as firms like Venmo are growing rapidly and causing businesses to adapt to new, easier forms of payment. Of course with any expanding industry, there will be growing pains. Finding ways to monetize free Fintech apps and simultaneously avoiding being the weight of enhanced regulation will be one of the many challenges. However, apps like RobinHood show that many fintech firms are revolutionizing the finance world as we know it.  
    
Going forward, large banks and asset management firms will need to consider acquiring these firms or implementing similar applications under their own platform in order to maintain market share. 

​(1) "PayPal President Talks Venmo Growth and Going beyond the Pay Button." New York Business Journal. N.p., 10 June 2016. Web. 03 July 2016. http://www.bizjournals.com/newyork/news/2016/06/10/paypal-president-talks-venmo-growth-and-going.html
 
(2) Staff, Motley Fool. "PayPal Holdings Inc.'s Venmo Is Growing and Plans to Monetize." The Motley Fool. N.p., n.d. Web. 03 July 2016. <http://www.fool.com/investing/2016/07/01/paypals-venmo-is-growing-and-plans-to-monetize.aspx>
 
(3) Shevlin, Ron. "The Future of Venmo." The Financial Brand. N.p., 17 Nov. 2015. Web. 03 July 2016. <https://thefinancialbrand.com/55401/the-future-of-venmo/>.
 
(4) Constine, Josh. "Stock Trading Was Expensive And Ugly. Robinhood's App Makes It Free And Pretty." TechCrunch. N.p., 26 Oct. 2015. Web. 04 July 2016. <https://techcrunch.com/2015/10/26/free-stock-trading-app/>
 
(5) Egan, Matt. "Millennials Jumped into Stocks during Brexit Scare."CNNMoney. Cable News Network, 30 June 2016. Web. 04 July 2016. <http://money.cnn.com/2016/06/30/investing/millennial-investors-brexit-market-scares/>.

(6) "With Lending Club Disgraced, An Industry Looks For Lessons." NPR. NPR, 10 June 2016. Web. 05 July 2016. <http://www.npr.org/sections/alltechconsidered/2016/06/10/481474919/with-lending-club-disgraced-an-industry-looks-for-lessons>.

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