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Almost a year ago, I downloaded Venmo at the behest of a friend. Though I am by no means a technophobe, I still shy away from tying personal information like my bank account number to a relatively unprotected app. I do not even like providing my address or name to create an online profile. But what makes Venmo different? Now, I am not about to sing Venmo’s praises, but I do believe it is an extremely functional app. In an industry where convenience is everything, Venmo’s potential value-add is almost too much to ignore. If Venmo continues to gain traction, we may well be moving into a world of different wallets, and currencies, for various reasons.

Venmo did not come up with Internet-based payment systems—Paypal did. As far as I know, Venmo did not even pioneer the mobile architecture that allows for peer-to-peer payment—a number of big banks, like Chase, had already been facilitating transfers through smartphones for quite a few years. Instead, Venmo differs in its unique fusion of an online transaction service and a social media platform.

Much of its success lies in its model of decoupling the bank account from actual transactions, even though the user profile is tied to the account. The transferred dollar amount represents Venmo credit in dollars. This credit never becomes actual currency until the user chooses to cash out. Even then, a one-business-day waiting time is required to actually receive the funds in a bank account. This means that in many situations, it is more advantageous to store Venmo credits for future use instead of having to convert them to real money. The takeaway here is that Venmo behaves like a digital wallet; it becomes more convenient to use it solely for P2P transactions, rather than as an asset to be converted to cash. It stores value for future payments and because it does not necessarily have to be tied directly to the money in your bank account, it can be used exclusively for the purpose of P2P transfers.

From an economic standpoint, the interplay between technological advancements and economics in Venmo cannot be overstated. The ease with which Venmo credits can be turned into cash, or transferred, means that it is an excellent supplier of liquidity—especially to the younger user demographic. Prior to Venmo, paying back small-scale monetary obligations was a troublesome task. A dear friend of mine used to always ask me to spot him when we dined out because he would not have cash on him. I would make a quick, mental IOU but the unpaid bills quickly piled up. Soon, both of us forgot how much he actually owed me. Being a good friend, I was somewhat nonchalant about these debts and wrote most of them off. The main difficulty, as I understood it to be, was not the dishonesty of my friend, but rather the implicit transaction cost of repaying with cash—a nettlesome trip to the bank. Although cash is the most liquid asset in the modern financial system, it is simply unrealistic to expect everyone—especially students—to always carry it on hand. Cards or checks can also facilitate settlements fairly effortlessly, but no one would reasonably accept a five-dollar payment in the form of a wire transfer. Essentially, we have a situation in which inconvenience is preventing economic activities from being properly and fully carried out.

By virtue of technology, specifically, the smartphone, repaying debt has become more feasible and convenient than ever. By taking advantage of prevalent ownership of smartphones (Gallup found that 62% of Americans now own a smartphone, with 88% of 18-29 year-olds dominating all other age groups), Venmo has found the perfect platform for executing money transfers. With Venmo, there is no time lag between withdrawing cash and paying a friend back. As long as both parties have Venmo accounts, all debt can just be settled on the spot. For thousands of Americans, a new kind of financial flexibility has been introduced into their lives.

That being said, Venmo must address a number of issues before it can be hailed as a new breed of liquidity in the 21st century. Even though it is a trending accessory at the moment, it has yet to reach a critical mass. Down the line, the crucial issues surrounding Venmo will include its ability to confront security issues and meet its own financial obligations. Security has dominated the recent national conversation about technology, following high-profile data breaches at enormous corporations such as Target and Chase. Already wary of providing sensitive information such as bank account and credit card numbers, it would not be a surprise if many Americans shied away from using another payment scheme that could be susceptible to hacking. Other common complaints stem from the fact that it takes one business day to convert Venmo credits to cash—a not-so-minor inconvenience.

Further fears arise from the potential of bankruptcy. Say that a panic happens, and a run on Venmo credits occurs. Like a bank, Venmo does not have all the money it needs to pay back its users. Unlike a bank, however, Venmo accounts are not guaranteed by a central agency such as the FDIC—which means that if the money is gone, users have little to no hope of retrieving it. Hopefully, Venmo will remedy these fears, and we will continue to see a proliferation of, and reliance on, digital-wallet apps.

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