It started with a simple dare: All Mike Linshi had to do was buy a certain shirt from a store nearby and wear it.
The bet was offered up in the easy evening hours after a music and innovation festival in Brooklyn two years ago. There was just something so funny about the thought of Linshi in that particular shirt that Iqram Magdon-Ismail and Andrew Kortina, cofounders of the New York–based peer-to-peer payment app Venmo, bet their colleague $50,000 he wouldn’t wear it. The sum was set high “just to shock him a little bit,” Magdon-Ismail recalls. And anyway, they had the cash: Venmo had been acquired for $26 million three years earlier by the payment processor Braintree, which was then bought by PayPal for $800 million.
Of course the shirt was obtained and worn, and Magdon-Ismail and Kortina were good as their word. They transferred the money on the spot, with an extra $50,000 going to the Venmo engineer who raised their account limits to make it possible. The next day, after the haze of the previous night wore off, the money was returned.
This kind of story may waft around barstools in San Francisco, where young founders can be more flush with cash than with a sense of what to do with it. The newfound wealth was unreal to Magdon-Ismail, an immigrant from Zimbabwe who spent his high school years in Fairfax, Virginia. “This is what happens when you make a little money,” he says, shrugging off the bet. “You want to spend it.”
But to Venmo parent company PayPal, the incident was grounds for an investigation. Three months after the festival, Magdon-Ismail, the then-president of Venmo, was sitting in front of PayPal’s compliance team, trying to explain why he was exchanging tens of thousands of dollars with employees. PayPal eventually closed the case (the recipients never actually accepted the money, after all), but Venmo’s growing pains lingered.
Magdon-Ismail and Kortina, who met at the University of Pennsylvania, launched Venmo in 2009 as a fee-free, digital way to ferry money between friends. The app pioneered the idea of social payments by publishing users’ transactions and memos in an emoji-filled conversational stream—catnip for millennials. Former Braintree CEO and now PayPal COO Bill Ready says it was the “crazy genius” of this stream—where you can see friends paying one another for pretzels and beer, roommates exchanging money for utilities and rent, and couples divvying up date-night expenses—that drew him to the app in 2012, despite the fact that it had only 3,000 users.
Ready knew that mobile money would eventually be huge. Prior to Braintree, he led a white label online payments and money management service for banks. Looking at consumer traffic behavior, he noticed people increasingly trying to access their bank accounts from their phones’ mobile browsers. This was in the early days of smartphones—before web pages were optimized for mobile—and typing in a username and password was a fairly irksome experience. But people were trying anyway.
This insight stuck with him and became a focus at Braintree, a payment processor that provided mobile services for Uber and Airbnb early on. While there was little competition in this nascent field, Ready realized he was missing the opportunity to create a consumer-facing product that would let people make single-tap payments. That’s when he came across Venmo, which had a payment app poised to capture the market.
Today, Venmo is the service to beat in the growing peer-to-peer payments space. It shuttled nearly $18 billion between people last year—$5.6 billion in the final quarter alone, up 126% from the previous year. (Though Venmo doesn’t release user figures, Verto Analytics estimates it has more than 7 million active monthly users, which still pales next to PayPal’s 197 million accounts.) The app’s growth is all the more remarkable for the fact that the product itself has remained relatively unchanged since joining the PayPal fold in 2013. For although Venmo’s founders had a prescient understanding of the millennial mind-set, they knew little about the financial regulations that applied to their product. For the past few years, Venmo has been consumed with turning itself from a move-fast-and-break-things kind of company into something more upstanding—and substantial.
As a payments service, Venmo is legally required to prevent money laundering and fraud, but the service launched with virtually no regulatory compliance built into it. It didn’t even verify users initially. Before its acquisition by Braintree, Venmo found itself playing whack-a-mole against fraud. People would hook up stolen credit cards to the app and cash out entire lines of credit. Others hacked legitimate accounts. Another ploy was to use Venmo to pay for purchases, and then pull the money back right after the item shipped. It was so easy for people to close out accounts that, Magdon-Ismail recalls, “we saw $200,000 disappear in one night.”
Once it became part of PayPal, Venmo got to work, with chief operating officer Mike Vaughan taking on the additional role of general manager in 2014. By plugging into PayPal’s compliance infrastructure, the app began tracking and flagging potentially fraudulent settlements. It added two-factor authentication, and, over the past three years, has created its own technology to ensure that the platform isn’t being used for illicit activities. “We have a unique challenge that you might not have with normal bank transfers or writing a check,” says Vaughan. In particular, the team at Venmo figured out how to understand the relationship between the sender and receiver. For instance, if a user is transacting with someone for the first time, Venmo can look at whether they have overlapping sets of friends to help determine if the relationship is legitimate.
While Venmo has largely laid low in the last couple of years, there have been glimmers of its compliance efforts in the news. Last year, in an essay for Vice, one user detailed how a $12.66 payment to his roommate for Thai food was held in financial purgatory for eight months because he captioned the payment “ISIS.” In another article, The Verge cautioned readers to avoid the phrase “idek,” which in millennial parlance stands for “I don’t even know.” Those payments were stalled for 96 hours. Such disruptions in service—caused by particular strings of letters and words—are evidence of Venmo’s new security infrastructure.
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