Venmo

My family is coming to visit us for the holidays this year, which is nice because we haven’t seen them since we moved to Europe. It hasn’t been too long, but it’s the first time we’ve lived farther than a two-hour drive away from them in our lives until now. It will be a well needed visit but also a stressful one. Naturally, most if not all places will be closed the day of and the day after Christmas, so we will need to cook enough for 8 during those festive days.

 Fortunately, my parents offered to help with some of the food costs. So, my mother does as we’ve all done and opened her Venmo app and press a few buttons and wham, money has been sent to my Venmo account. Easy peasy.

Paying Friends has never been so easy

It's hard to imagine how we got on in the US paying each other back for trivial things before Venmo. At the bar, you could rotate rounds and hope that everyone pays their fair share. But in that case, we end up subsidizing Sandra’s espresso martinis, and I didn’t order those plate of fries! Don’t involve me in this.

At a restaurant, it was common practice for a waiter to be able to know who to charge who in a group of eight and hand out eight separate bills. If I split the bill in the Netherlands more than 2 ways, at best I would get a stink eye, and more likely they would outright refuse.

You could always pay with cash (utters the German in the crowd)! But that is less and less common and again, you would need precise change. God forbid, you go into your online banking app in the US and type out the account number AND routing number and do an ACH transaction to your friend for the $27.45 you owe them for the burritos (that seems like a lot).

So, in 2009 two college students notice how crappy this experience is and dare to make something better. Originally, the idea was to set up the payments between friends through text messages. Eventually with the advent the smartphone they were able to develop an app, Venmo.

I’m sure most from the US are aware of how it works but for those who don’t, here you go. You set up an account on Venmo and connect it to a bank account or debit/credit card and fund your Venmo account. When you want to pay someone back for drinks or uhhhh drugs apparently, you send a certain amount from your Venmo account to another person’s Venmo account. You look them up with a tag name and avoid any routing numbers. And instantly you’ve paid your friend $4.56 for that pretzel and you can add a little pretzel emoji in your message to them. Isn’t that fun? Payments in the US are officially a solved problem. Pack it up everyone.

…..

Not so fast my friend

If you’re not from the US and don’t live in the US, you might be wondering, that seems like something we have but with extra steps. You would be correct.

With Venmo, you link your bank account to your Venmo account but all of the transactions are happening within the Venmo system i.e. the bank accounts that Venmo holds for the customer’s benefit. You can always cash out via an ACH payment, but that will take 2 or 3 days usually. No point in paying out what you got from Jimmy if you just have to pay John the next day. So that money my family gave for Christmas dinner doesn’t go directly to food costs. Rather it’ll lie in there until I have to pay Bob for drinks next Wednesday.

Although currently, it seems I don’t have much use for my Venmo account as no one uses it here, simply because there is no need to.

One of the things I was delightfully surprised about when moving here, was how easy it was to pay someone for anything and not need a card or an extra app. Sure, at restaurants it’s still common to pull out that card but from everything to renting my washer/dryer to paying my immigration lawyer, I’m able to pay direct to the bank account without any of the fees that would normally come with a card or a wire.

They just pass me their International Bank Account Number (IBAN) and I send them a payment from my banking app. If the recipient bank is in the same country as the sender, the transaction happens usually in a matter of seconds. If it’s outside of the country but still in the Euro Zone, it may take longer but I have yet to see it take longer than a day.

Here in the Netherlands, there is an infamous app, Tikkie, that allows you to easily to collect what people owe you for dinner. Your bank and WhatsApp app are linked to the app and friends and family simply use a number they have in their phone already and skip the IBAN entirely. Unlike Venmo though, the money is still directly account-to-account at your own bank.

Other countries in Europe have similar apps: Sweden has Swish, Spain has Bizum, Payconiq in Belgium, and so on. They all have one thing in common that allow them to build these tools, the Single European Payments Area (SEPA)

SEPA

When comparing the banking systems (or really any business matters) between the US and Europe, you’ll quickly find that US tends to be market driven while Europe tends to be regulation driven. I’m not going to debate what is better but from afar SEPA is an impressive coordination of cross border payments between countries that it has reduced the cost of moving capital by billions of dollars a year.

With the introduction of the Euro in 1999, the need for a single payment area framework became apparent with persistent cross border payment issues. The currency was the same but you might have to pay marked up fees to make payments just across the border versus a domestic payment on the other side of the same country. Furthermore, those payments took longer than domestic ones creating a disjointed payments union. Imagine if the US had different payment systems for the same US dollar. Imagine being in El Paso and paying milk in New Mexico is more difficult than paying for something from Nacogdoches.

Scale for above reference

In the coming years, the EU built out the legal framework of how banks and businesses should be able to handle payments across SEPA, limiting or outright eliminating cross border fees. They also introduced standardization in the form of messaging using ISO 20022 that all banks using the Euro had to conform to.

I’ll spare the details, but the result has forced financial institutions to build conforming standard and infrastructure that has allowed innovation and, in my opinion, a better consumer experience overall. I think the more interesting question is, why don’t we have this infrastructure in the United States.

Why Not?

As mentioned above, the US solution for these types of things is to let business and startups figure it out. And that is how we have things like Venmo and Zelle. And I don’t say that to bash on those companies either. The US P2P products offer a great solution to the infrastructure in place today. They have genuinely good user experiences and solve a real problem that would persist without them. But when I compare it to what I have here in Europe it just feels clumsy and impractical.

You could point to some cultural differences. The idea of an

 IBAN that you share willingly would definitely make many Americans want to clutch their pearls. Ask them to share their bank account number even though you can’t do anything with it without further authentication. Meanwhile, go to an American restaurant and pay by card. A European would be horrified to see the waiter take the card out of sight to be swiped. 

Re-enactment of paying a bill at Applebee's

You could say that the US banking system, while all in one country, is still fragmented with its thousands of banks and credit unions. Meanwhile most European countries have no more than a dozen mega banks with the IT budget to make these changes. At the same time, the American bank system came together before and created the Automated Clearing House (ACH) in response to the volume of checks in use. And that was in the 70’s when the industry was even more fragmented!

But at the end of the day, maybe the problem isn’t worth solving in the US at the moment. Afterall, SEPA was originally in response to the problems of cross border payments. The US is big enough, that most ventures don’t need to expand outside the US to make it big. There’s less need for cross border payments and the innovation that has come with it. So, maybe Venmo and the rest are just good enough to pool for that office Christmas gift.