Venmo battles P2P fraud as the app becomes a star attraction at PayPal

PayPal is using Venmo's fast growth to power several initiatives, but the app suffered a damaging fraud surge early this year, showing it's not immune from enrollment fraud that challenges the entire P2P sector.

Venmo's fraud spike led to larger than expected quarterly losses for PayPal earlier in 2018, The Wall Street Journal reported, citing internal documents. In the first three months of 2018, Venmo reported an operating loss of around $40 million, 40% higher had been expected. During the quarter, Venmo's transaction loss rate went from 0.25% in January to 0.40% in March, the report said.

It is not unusual for P2P payment services to endure fraud that starts with the consumer signup process, said Shirley Inscoe, senior analyst with Aite Group.

Andrew Harrer/Bloomberg

"There can be several reasons for Venmo’s fraud experience," Inscoe said. "With all of the data breaches, it is easy for fraudsters to impersonate a consumer and use the person’s account information to sign up for Venmo."

In an email, PayPal said it has resolved the fraud issues facing Venmo.

"When introducing new features, it is not unusual to see short periods of elevated losses," the statement noted. "In Q1 of 2018, Venmo had multiple new features that were introduced and received exceptional customer demand. As loss patterns emerged, the Venmo team quickly updated the new features to prevent losses and protect customers."

With a new instant transfer feature, it meant suspending the new feature for a few days and then reintroducing it, PayPal noted.

"Suspending that feature temporarily was the right thing to protect customers," the company added. "Venmo users have continued to enjoy those new features with Venmo's protections against unauthorized access and at loss levels that are inline or better than our expectations."

These losses come during a time when Venmo shows strength in other areas. In its most recent earnings report, PayPal said Venmo has enjoyed triple digital growth in its usage and user base. PayPal also reported progress in Venmo's path to profitability;h PayPal CEO Dan Schulman said Venmo is near a "tipping point."

Venmo is also benefiting from an agreement to provide PayPal and Venmo payments within the American Express app, and a plan to present a Venmo pay button on checkout pages of PayPal merchants.

Real-time P2P services such as the bank-supported Zelle have acknowledged a link between security concerns, bogged down enrollment processes and consumer angst.

Financial institutions are also grappling with account takeover fraud. A fraudster who successfully gains access to an account can drain the funds quickly using Venmo transfers, Inscoe said.

"False registrations, or application fraud, and account takeovers are the two most significant challenges financial institutions face in the current market, and will continue to be until technology improvements are implemented to more reliably authenticate consumers," Inscoe said.