Brief:

• Venmo had an operating loss of $40 million in Q1 2018 partly because of a jump in fraudulent payments that led the digital money-transfer company to halt some services to prevent suspicious activity. The loss was 40% greater than what the PayPal-owned company had estimated, The Wall Street Journal reported.
• As part of the fraud crackdown, Venmo stopped letting customers transfer funds instantly to their bank accounts while also blacklisting tens of thousands of users that algorithms had identified as possibly fraudulent. The actions backfired as Venmo declined many legitimate transactions, leading to angry reviews on mobile app stores and frustrated users.
• Fraudulent activity includes creating new Venmo profiles with stolen credit cards and sending money to co-conspirators, or hacking into accounts of existing Venmo users and stealing money. Because Venmo usually compensates users for their losses, the company's transaction loss rate climbed from about 0.25% of overall Venmo volume in January to 0.40% in March, the Journal reported.

Insight:

Venmo was an early pioneer in person-to-person mobile payments and developed a massive following among millennials who used the app to pay rent, split a restaurant tab or reimburse friends. Unfortunately, scammers are continually developing ways to exploit electronic payment platforms. Zelle, the Venmo rival started by major U.S. banks, also became an avenue for fraudulent activities such as making fake online sales. Some Zelle users found out the hard way that the service doesn't offer buyer protections and is more intended for payments among friends and family, according to TechCrunch.

The Journal's report is somewhat surprising for the scale of the fraudulent activity on Venmo, which will end the year with 22.9 million users, according to eMarketer estimates, compared to 27.4 million for Zelle. Venmo wasn't prepared for the jump in fraud, and management worried that losses were significant enough to hurt parent company PayPal's estimated earnings, the Journal reported. A PayPal spokesperson said Venmo's loss levels for Q1 2018 were less than 0.35% and have continued to decline, indicating that the company's steps to curb fraud have so far been effective.

Venmo has been a bit of a financial drain on PayPal since the companies merged in 2013, particularly because Venmo just recently began charging users small amounts for money transfers on its network, even as its costs have risen. Venmo is adding services to boost revenue, including the introduction of a plastic debit card. Users also can pay a fee for immediate cash withdrawals and make payments to Uber, GrubHub and about 2 million other online retailers. One in four Venmo users completed a transaction that generates revenue, PayPal said last month, which is a positive sign for the payment service as rivals like Zelle grow increasingly popular. Venmo's transaction volume surged 78% to about $17 billion in Q3 from the prior year, outpacing PayPal's 25% increase.

Online fraud attempts on retailers are expected to rise 14% during the holiday shopping season from a year earlier as total purchase volume rises 18%, according to payments company ACI Worldwide. The attempted average size of a fraudulent payment at an online retailer will increase 3% from $236 to $243, ACI estimated.