Amazon Takes Venmo…

This is a win for PayPal and Amazon. Paypal gets: 1) incremental volume and 2) consumer behavior for Venmo in eCommerce, 3) easy extension into BNPL with Venmo transaction.

Big news from PayPal’s earnings yesterday was Amazon taking Venmo. I wanted to summarize the 15 tweets on the topic and provide a little more background into the dynamics. 

Amazon is an amazing company from a people perspective, perhaps the best TEAM I’ve had as a customer. They always proceed within a plan and purpose. So why Venmo?  As I related 2 weeks ago, Amazon is working to reduce the costs of payments. They have managed fraud down to 3bps.. So why can’t their processing costs look a lot more like Walmart? They have been successful in achieving this in EU (Sepa DD) and India (see blog), but the US remains (by far) the highest cost geography. 

Amazon has always wanted consumers to pay with whatever payment instrument they choose. This consumer choice (within US) has resulted in a payment mix heavily weighted toward credit cards, as few consumers use debit in eCommerce. Venmo enables a consumer preference for debit on Amazon and will reduce costs from ~200 bps to ~80bps


Venmo is the leading digital wallet for P2P transactions and is funded by a debit card and ACH. Historically the mix has been ACH (no fee as funding source of P2P account, 3% fee for debit load). Beginning in 2019, Venmo became the “beta” user for The Clearing House’s (TCH) RTP network (for Merchant disbursements). RTP didn’t have fraud data so it required a partner that could manage fraud risk before the transaction (see blog). Thus within this Venmo’s ACH volume, roughly 10% runs on RTP (disbursements to merchants that are RTP enabled).

While TCH’s RTP has a network of 200 banks, only the 18 large banks can send payments. Wells has been Commercial Depository institution and is PayPal’s RDFI since its founding, Chase is PayPal’s merchant bank. Thus Chase can remit funds to 200 banks as merchant “cash out”. While the other 17 banks are able to send funds at wholesale level, must have not integrated consumers accounts to an RTPA account. With the PayPal/Amazon deal, it would seem Venmo has has obtained “buy in” of TCH member banks to become the eCommerce play for TCH? While technically it only takes one TCH member to send.. TCH is a bank owned entity, with owners as BOD members. Enabling Venmo for real time payments to merchants would be a BOD level topic. Chase has the win-win here. The have the Amazon co-brand, they process all card payments and the are now enabling Venmo disbursements through RTP. (future blog).

Venmo funding source
I am shocked by this graph and question accuracy for wallet loads. from

The costs for “loading” funds onto a P2P wallet are ACH ($0.05), RTP (~$0.10) and for debit the run as AFT transactions ($0.21 for regulated and 1.75bps + $0.20 for non Reg). Important to note the consistency of AFT network pricing (for wallet loads) with debit interchange. Per V/MA rules, a wallet that is only used for P2P transactions is a “stored value wallet” (see Visa rules 7.4.7 and Visa’s Wallet Policy Document)

When Venmo is used to make a purchase with a merchant, the wallet rules change from a stored value wallet (P2P) to a Staged Digital Wallet (purchase). Within the staged digital wallet there are 2 subtypes of transactions

  1. Pre-Funding (prior to transaction)
  2. Back to Back – aka Live Load/Real Time (ie no funds in wallet)

Page 10 of this Visa Document

Costs/Transaction Types

As Venmo transitions from P2P to a purchase instrument, the rules and costs change. Note costs for Reg stay same ($0.21 + 5 bps) but costs for non reg debit proceed with negotiated tier (ex CPS/Retail 2 – 65bps to Standard – 190 bps).

Per the Table above, if Venmo only lets you purchase with a pre-existing balance in Venmo, the costs to PayPal for this Funding will be covered by AFT (Regulated banks AFT $0.21 exactly match the Durbin regulated rate). If Venmo allows for real time load, it will need to operate as a purchase transaction on the debit card. 

AFT costs for regulated and non regulated transactions are

Venmo ACH (update)

Venmo’s funding mix graph was a big surprise to me. My guess is that the graph certainly represents cash out.. but NOT CASH IN. My assumption is that 80% of “Load” is done with debit card.

Cost of Funds – Debit Card Load

Assuming a average ticket size of $50, with a 20% ACH and a 80% of debit funding (40% Regulated debit) results in average payment cost of funds for Venmo (in a purchase) of  119 bps

20%*$0.05 + 80%(40%((50*0.0005)+0.21) + 60%(($50*0.0175) + 0.2))  divided by 50 = $059/$50 = 119bps

Cost of Funds – ACH Heavy. Assuming a average ticket size of $50, with a 70% mix of ACH (ignoring TCH/RTP incremental costs above ACH) and 30% debit (of which 40% is Regulated debit) results in average payment cost of funds for Venmo (in a purchase) of  51.3 bps

70%*$0.05 + 30%((40%(50*0.0005)+0.21) + 60%(($50*0.0175) + 0.2))  divided by 50 = $0.257/$50 = 51.3 bps   

Venmo as a payment instrument on Amazon may have different funding dynamics than Venmo as a P2P service. Assuming there is no change, a Venmo eCommerce 51.3 bps cost of funds is below PayPal’s blended cost of funds (est 90-100bps) and PayPal could price at discount as a way to kick start Pay with Venmo. I must point out that I question the “source of funds” graph above. I am shocked if this holds.

Assuming the ACH funding heavy mix, my guess is that Amazon and PayPal struck a deal where Venmo payments sourced from a regulated FI were at a 50-70bps tier.. And non-reg were at ~90 bps with PayPal owning the fraud loss. Why? There would be Durbin implications if PayPal funded wallet with a $0.21 reg debit and then charged 90bps.. By segregating the transactions they ease the compliance burden.. on PayPal and Visa. Does ACH fit in? sure, but rules and enforcement here are limited, and this consumers may switch funding types.

My biggest questions?

  1. Pricing. Did PayPal price Venmo into 2 rate tiers?
  2. Will V/MA network volume be impacted?
  3. Are the Banks sponsoring Venmo as a debit alternative?
  4. Will ACH mix change in a Venmo purchase on Amazon? My guess is that Banks will look to curtail the Plaid instant verification once the RTP network grows and the Akoya/EWS instant ID services take hold.
  5. Will Venmo on Amazon kick start Venmo as a payment instrument?
  6. Can PayPal differentiate Venmo from PayPal? Do they want to? It would seem to operate on a lower cost of funds. How will they promote checkout with PayPal vs PayPal vs Venmo
  7. Did PayPal find a way to negotiate Venmo debit funding down to the CPS/Retail 2 category of 65ps (based upon volume) for the non-reg banks? How does this work within the TCH/RTP pricing scheme? Someone in this network will answer.


This is a win for PayPal and Amazon. Paypal achieves:

  • Incremental volume (at reduced margin)
  • Establishing consumer behavior for Venmo in eCommerce
  • Opportunity to extend into BNPL with Venmo

Amazon benefits from reduced costs of payments and risk rules they can work with. 

Visa/MA? I’ve change my mind here. Given the involvement of banks in RTP and their direct agreements with PayPal, Venmo may be the Banks effort to create a new online debit payment scheme.

Banks loss?

  1. Consumer shift from credit to debit
  2. Loss of Data
  3. Loss of Brand
  4. Consumers sending online banking credentials to Venmo for “instant credit”
  5. ACH support/compliance/research.

13 thoughts on “Amazon Takes Venmo…”

  1. Great post, Tom. I have two thoughts/questions.

    1. Why would Venmo putchase cost of funds be any higher than Paypal’s blended avg? Are more Venmo users using unregulated debit than legacy PayPal users do?

    2. If Amazon is so laser-focused on lowering transaction costs, how are they funding the 5% cash back cards with SYF and Chase? I assume Amazon pays for a decent portion of those rewards, right?

    1. My error.. I didn’t realize ACH mix was so high. Open question as to how Venmo users will fund an Amazon transaction.

      on Second point.. I don’t have any insight here.

    2. I think the credit card program is more about net benefits to Amazon than about lowering transaction costs. Amazon may shoulder none, some or all of the rewards for on-us or off-us transactions, but in return they very likely get a handsome finder’s fee and a share of either the transaction volume or the revenue that the portfolio generates. Those are the common types of cobrand agreements I have seen at work.

  2. The ACH load % didn’t surprise me as much; that’s how I use Venmo. I don’t keep a balance; instead, every time I send money, it schedules an ACH debit and takes the NSF risk. That’s how the loads could be so weighted towards ACH; up until now, Venmo hasn’t really pushed the wallet option. Of course, that may change if the Amazon deal is a prelude to a full-fledged Venmo wallet.

    1. Actually, I just checked, and using a bank card to send money incurs a 3% fee to the sender. If most people are still using Venmo as a P2P service, that would be a non-starter right there, unless they don’t have a bank account and are using a prepaid debit card.

      1. Thanks Aaron… I just updated blog for this.. BTW… roughly 40$ of ACH actually goes on the TCH/RTP rails.. and the Banks may be sponsoring PayPal/Venmo as THE eCommerce extension of RTP.

  3. Pardon my ignorance, if Venmo users fund with ACH, does that not circumvent the V/MA network entirely? If so, how is this development not a negative for the networks?

    1. Great question.. in my original post I had incorrectly estimated 80 debit.. found more data.. did not adjust that conclusion. Additionally today I learned that 40% of the Venmo ACH volume goes thru TCH’s RTP.. and the banks may be actively sponsoring Venmo as the eComm alternative to V/MA (RTP based).

      1. Given the whole “decoupling the networks” trend, which co would you back with a 3-5 yr view?

        (I like V/MA, but PYPL might be better in this case?)

        1. My previous blog on topic Intelligence is flowing out of centralized hubs into nodes of the network. Thus companies that can help nodes operate more efficiently fall into two groups: consumer nodes (Affirm, Square, Paypal) and Merchant nodes (Adyen, Stripe, …). The challenge with consumer champions is that financial services is becomming embedded and something consumers don’t even think about. So I much prefer merchant nodes concentrators.

          Key characteristics
          1) Specialization in either Vertical or process
          2) Tight integration with core systems (Adyen)
          3) Remaking the consumer experience and the financial product (Affirm)
          4) Bundling payments within a new overall value proposition (Target Redcard, ?Affirm)
          5) Great teams with very very deep experience and proved ability to execute

          Affirm, Adyen, Stripe, Shopify fit well here

          1. Thank you. I see the value in Adyen/Stripe, but fail to see the true value add of AFRM/Klarna.

            How do you get comfortable with the low/no requirements for financing and how is it plainly said, different than financing with credit cards?

  4. This is tangential to your post, but you said “They (Amazon) have managed fraud down to 3bps..”

    I bet that low rate has more to do with their business dynamics than any concerted fraud detection breakthrough. Amazon volume is heavily skewed to repurchases, as everyone and their third uncle buys from them regularly enough and so the rate at which they see new cards from new customers must be shrinking to zero which helps quite a bit with fraud detection.


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