Payments

Trust issues in payments give banks a leg up over Venmo

  • A LendEdu poll found that a third of millennials have used Venmo for drugs and a fifth of them have used it for betting or gambling.
  • For banks and fintech companies operating peer-to-peer payments services, pinpointing illegal transactions isn't always an easy task.
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Trust issues in payments give banks a leg up over Venmo

While Venmo is popular among millennials, a new LendEdu study suggests it’s also a place where money moves to fuel illegal activities such drugs and gambling. While the user agreements for Venmo and competing bank peer-to-peer payment service Zelle forbid their use for illegal activities, pinpointing illegal transactions isn’t always an easy task. But banks may have an advantage in garnering the trust of a broader range of users, including older ones who may be more comfortable using legacy institutions.

The poll from LendEdu, an online marketplace for student loan consolidation and refinancing, surveyed around 1,200 millennials, finding that around a third of them had used Venmo for drug payments (marijuana, Adderall, cocaine and others) and 21 percent had used it for betting or gambling.

Brad Blake, director of digital strategy and marketing at branding agency Hill Holliday, said Zelle may have a leg up on competitors in reaching non-millennial customers due to its integration into the banking infrastructure.

“That integration, ubiquity and speed is helpful from a marketing standpoint because we’re not asking people to download another app where their money sits outside their bank account,” he said. “Plus, the transactions are protected by the banks’ security, which isn’t necessarily true of nonbank peer-to-peer services.”

Others say clamping down on illegal transactions is hard for both banks and newer players.

“I don’t know if any peer-to-peer providers can monitor what the purchases are for,” said Talie Baker, senior analyst at Aite Group. “They can use Zelle just as easily to buy drugs as Venmo; I don’t know if they would have a leg up.”

The use of Venmo for drug payments has been in the public eye for years; for example, a 2011 Gizmodo post has the title, “Is digital money the new way to buy drugs?” And the logic that digital money is vulnerable to use by criminals because it’s less traceable is the same rationale behind bitcoin’s “PR problem” that keeps the banks away from it.

TD Bank, a participant in the Zelle peer-to-peer payments network, said the bank has various safeguards in place, but for security reasons, it can’t disclose its internal controls publicly. A source familiar with the Zelle network suggests banks have ways to monitor suspicious behavior, but that it depends on behavioral trends from users.

If you’re found to be in violation of the terms, you would be kicked off,” he said. “But unless there’s a significant pattern of behavior that shows a customer is doing something illegal, I don’t know what would get flagged.”

PayPal-owned Venmo, which processed $6.8 billion in payments in the first quarter of this year and $17.6 billion in payments last year, said in a statement that it takes laws, rules and regulations seriously, and that users are prohibited from using the app for gambling or drugs. “If there is a situation where evidence of gambling or other illegal activity is brought to our attention, Venmo works quickly to take appropriate action,” the statement said.

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