FORTUNE — Hours before I met Andrew Kortina, I had already given him my credit card number. I don’t do this with just any stranger. But Kortina and his cofounder Iqram Magdon-Ismail have built a service called Venmo, which promises to make mobile payments so easy, people will actually start to make mobile payments. And after a lunch bill that my friend refused to let me pay for in downtown Philadelphia, I was determined to make my friend take my money. So I downloaded the Venmo app, registered my account, specified the amount I wanted to pay and to whom, and typed in those 19 numbers (including the three on the back of the card) that control my finances.
All of this will not sound terribly novel. That’s because I — and, no doubt, many of you — did something similar years ago with Paypal. And PayPal, as is expected of a huge company with thousands of employees, also has a mobile app. One that I could have used just as well as Venmo’s to pay my friend back. This is Venmo’s — and hundreds of other startups’ — problem: Why use the new guy when I already trust the old? How can a startup oust an established company when all it has are a million dollars in venture capital and a propensity for all-nighters?
Venmo’s answer: Put your head down, code like hell, and make a product that’s maniacally devoted to making commerce as social as possible. That’s about the only strategy possible when you’re a handful of developers going against a service that plans to move $2 billion in mobile payments in 2011.
It’s not that Kortina isn’t a fan of PayPal’s app. “It’s totally useful,” he says. But he’s convinced he and his team can do better than “useful.” They’re attempting to make an app that provides “emotional” and “historic” value. His vision is that looking through our Venmo history can be just as nostalgic as clicking through a Facebook album. And the more those payments are shared, the better. When you go to pay someone in Venmo’s app, it automatically assumes that you want to share your payments (the what, not the how much) with the world on its site and your Facebook account. The social aspects of Venmo are its major differences from PayPal. And Kortina thinks they’re proof that Venmo understands something fundamental to the way we live now. “The problem we’re solving is one of utility, but it’s also one of social interaction.”
He’s telling me this while he drinks a cappuccino at his friend’s coffee shop around the corner from Venmo’s office, which is more aptly described as an empty apartment furnished only by desks and a stray bike. Venmo’s asceticism extends to its payroll, which has only five people on the books. It’s a state of being that techspeak calls “bootstrapping,” a euphemism for “we’re poor and we don’t know when we won’t be, so we might as well distract ourselves by working really hard in the mean time.” There’s a reason the idiom evokes the American dream.
Venmo’s spare parts are what make its challenge so quixotic. And so intriguing. Last month more than $500,000 changed hands using Venmo; last year $750 million moved through PayPal — over mobile devices alone. Five people work for Venmo; thousands work for PayPal’s security team. Venmo, playing to type, hopes “not to make money any time soon.” PayPal contributed $3.4 billion in revenue to eBay (EBAY) in 2010. This isn’t just David vs. Goliath, this is David vs. Goliath’s army.
And there are other challengers. American Express (AXP) has debuted its own mobile payments app, called Serve, that doesn’t even require you to be an American Express customer to use it. All of the technology runs off a separate service from a three-year-old startup called Payfone, which basically turns your phone number into your new credit card number. Visa and Mastercard are working on their own mobile payment technologies, especially intrigued by the promise of swiping a phone at checkout instead of a credit card. Avin Arumugam, PayPal’s Senior Product Manager for mobile, says he’s noticed more excitement even within PayPal. “When I used to go talk to the rest of my payments people about mobile payments they used to have a little smile under their breath and go, ‘Yeah, great, mobile payments.’ Now they’re coming to me and saying ‘Ah, what are you guys doing in mobile payments?’”
But Kortina is adamant that he doesn’t lose sleep thinking about his competitors. There’s a blind faith that if Venmo is a good enough product the rest will take care of itself. If Venmo can just be the best at one thing (peer-to-peer payments), he thinks it’ll attract the network it needs to thrive. He compares it to the different ways we communicate. “There’s a whole lot of difference between sending a text message, sending an email, sending an IM, and sending a Facebook message, but you probably use them all slightly differently for different people. There’s some sort of social interia around which [means of communication] to use.” Friends merit texting and Venmo; strangers demand email and Paypal.
This, of course, is what he has to think, what anybody crazy enough to devote his life to an idea has to think. All of today’s dominant startups had to fight their way through a crowd at some point. But I worry for Kortina and company. Mobile payments rely upon different kinds of social networks than the emailing, texting, and IMing he cites in his example. I can email anyone I want from my Gmail account, whether they’re at Hotmail, Yahoo (YHOO), or a company address. But mobile payments — like Facebook and Twitter — work differently. If someone isn’t signed up for Venmo, I can’t give her my money. Until they join my network, she may as well not exist.
In some ways, that’s Venmo’s greatest marketing tool. The easiest way to spread a product is to essentially pay people to use it. But that ignores that 90 million people are already using PayPal — 5 million of whom are doing so on mobile devices. (Venmo won’t say how many people have signed up for its product.) And PayPal is the service that has a perception of authenticity that stems from its early days as eBay’s official currency. Kortina, aware Venmo needs to somehow become a trusted brand, admits, “Not every person is going to want to try a brand new financial service.”
My friend — the one I owed $10 for lunch — is one of them. “You mean I have to give them my personal information to get your money?” he asked. Yes, I said. Forget it, he said right back. Not worth the hassle. Of course, he would have had the same complaint if I had used PayPal. He didn’t have an account there either.
–This has been another installment of Fortune’s column on startups and the tech bubble that may or may not exist. Email comments, rants, and $10 bar tabs directly to me. Or watch my Twitter feed for an up-to-date account of what I want the world to know I’m buying (read: nothing).