Venmo: Its Business Model and Competition

What Is Venmo?

Venmo has emerged as one of the most popular apps for electronically transferring funds from one party to another. Its explosive growth is largely driven by millennials, who even use its name as a verb, as in: “I’ll Venmo you for the food.”

Venmo was originally created by Iqram Magdon-Ismail and Andrew Kortina, who met as college roommates at the University of Pennsylvania. As the story goes, the duo was helping a friend launch a frozen yogurt store and grew frustrated with the inadequacy of traditional point-of-sales software. Then at a local jazz concert, they conceived the concept of instantly purchasing MP3s of the performance, via text message. They soon developed a prototype for sending cash through text messages before pivoting to a smartphone app approach.

In 2010, Magdon-Ismail and Kortina raised $1.2 million of seed money through a financing round, then two years later, their company was acquired by Braintree, a fintech payments company. In 2013, PayPal acquired Braintree for $800 million.

There was initially little fanfare around Venmo, until an aggressive marketing push in 2015, when PayPal announced the slogan: “Pay with Venmo,” and instructed customers to use the app at retailers, in lieu of cash or credit cards. The timing for this campaign perfectly aligned with an economy where cash is slowly becoming obsolete, and people are less inclined to write checks or visit the ATM.

Venmo Business Model

Venmo does not charge individual users for sending or receiving payments, nor does the company charge any monthly or annual fees. Venmo generates revenue via its interchange and withdrawal fees, interest on cash, fees for cashing checks, Pay With Venmo, and affiliate commissions on its cashback program. Venmo also charges a 3% fee it charges for credit card transactions.

Venmo offers a debit card in partnership with Mastercard (MA). As a result, users can use their Venmo balance to make purchases anywhere MasterCard is accepted in the United States. ATM withdrawals are free as long as they accept MoneyPass. Otherwise, there could be a fee. Then, in 2020, Venmo launched its credit card. Synchrony Bank issues the Venmo Visa Credit Card.

How Venmo Works

Venmo facilitates digital payments within a social network of known friends. Here is a step-by-step illustration of how it works:

Interestingly, the text fields are often flooded with emojis, such as slices of pizza and beer steins, which signal the nature of many Venmo exchanges.

Why Venmo Is Popular

Like Meta (FB), formerly Facebook, Instagram, and WhatsApp, Venmo grew exponentially through peer-to-peer networking. Users are attracted to the following features:

• Unlike its competitors, Venmo doesn’t charge users to send or receive more money, although credit card-based payments are charged.
• Venmo is one of the most popular payment-splitting apps with millennials. For example, roommates can split the rent, and each pays their share to the landlord via Venmo.
• Users can make payments despite insufficient Venmo balances because the deficit amounts are retrieved from a primary funding source, such as a savings account, credit card, or debit card.
• Payments can be made to those who don’t use Venmo, although the recipient will have to sign up to accept money.
• The “Nearby Payment” function facilitates payments to people outside a user’s friend group, provided they are in close geographical proximity.
• A “trust” feature lets users auto-pay for recurring expenses, like the monthly share of rent due.

Limitations of Venmo

Because Venmo is currently available only in the U.S., no transactions may be made outside the country, even by American users. Also, security remains a concern for those skeptical of using mobile payment platforms, despite the app’s advertised security settings.

Another limitation is that Venmo is primarily available for personal use, versus business purposes, and is linked to personal bank accounts or credit cards. Venmo is generally not supposed to be used for purchases. As the company notes, Venmo can be used to pay for goods or services using a Venmo Debit Card, mobile websites, with apps that are approved to offer Venmo, and in-store with a QR code.

A final limitation is that users are capped to sending a maximum of $6,999.99 per week, on a rolling basis, and the same goes for receiving. That cap includes payments between two individuals, with the debit card, with approved apps, and with an in-store QR code. Payments that are person-to-person are capped at $4,999.99 per week.

This can be an issue if you need to send or receive a large sum, or several smaller sums over a week’s period of time.

Venmo Competitors

There have been significant changes in the mobile-payment business since Venmo came about. In addition to social media companies, banks are now vying for a piece of the mobile app revenue stream that was once reserved for technology, Fintech, and software companies.

Google Pay

Google Pay is the closest competitor to Venmo and the most similar. Both are free to use when linked with a debit card or bank account, but Google Pay is available outside the U.S.

Apple Pay and Android Pay

Apple Inc.’s (AAPL) Apple Pay is a payment system used for making purchases in stores with a fingertip reader on iPhones. This app only works on iOS products and is unavailable to Android users. However, Google developed Android Pay, which is essentially the same thing.

Zelle

A group of U.S. banks teamed up to launch their own money transfer app, called Zelle, which offers money transfers between bank accounts within minutes. According to Zelle, many major banks are partner financial institutions, including Wells Fargo, J.P. Morgan, and Bank of America. In 2020, the company facilitated $307 billion in transfers with 1.2 billion transactions.

Similar to Venmo, Zelle offers split payments and transfers for no fee to anyone that you trust as long as they have a bank account in the U.S.

Zelle could become the biggest competitor to Venmo, considering the size and scope of the client base for all of the banks involved in the Zelle partnership. Venmo averages around $10 per payment, which could indicate that Venmo is used for smaller transactions, such as meals, while Zelle is more commonly used for bills and rent.

Popmoney

Popmoney is a payment provider that allows transfers between its 1,700 participating financial institutions. Popmoney is similar to Venmo but charges $0.95 to send money from a debit card or bank account. It’s powered by veteran bank technology provider Fiserv.

Small businesses can use Popmoney, which allows transfers to employees, customers, and vendors. Conversely, Venmo doesn’t currently allow businesses to use their service.

Cash App

Built by Twitter Inc. (TWTR) co-founder Jack Dorsey, Square, Inc.’s Cash App offers free debit card-based transactions through its mobile app.

Meta

Meta also has a free money transfer service via Facebook Messenger, letting users link debit cards and transfer money as easily as sending a text. However, if you have a business page on Facebook, you can not send payments on behalf of your business.

The Bottom Line

Mobile phone apps make lives easier and more convenient. Venmo has the potential to replace checking and credit card use with minimal or zero-cost electronic peer-to-peer transactions. The field will likely become more competitive as new players enter the race.