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 instead 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.

Key Takeaways

• Venmo has emerged as one of the most popular apps for electronically transferring funds from one party to another.
• Venmo facilitates digital payments within a social network of known friends and people nearby.
• Unlike its competitors, Venmo doesn’t charge users to send or receive more money, although credit card-based payments are charged.

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.

Note

ATM withdrawals are free as long as they accept MoneyPass. Otherwise, there could be a fee.

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 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 for 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.
• A “schedule” 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 instead of business purposes and is linked to personal bank accounts or credit cards. Venmo is generally not supposed to be used to receive business, commercial, or merchant transactions. 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 $60,000 per week on a rolling basis, and the same goes for receiving. Payments for purchases using an in-store QR code, or using Venmo at checkout online or in other apps, are capped at $7,000 per week.

Payment caps 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. If you plan to use Venmo for amounts larger than the caps, make sure you plan ahead for multiple payments.

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 a close competitor to Venmo in the United States, but with a much greater geographic reach. While Venmo is only available in the United States, Google Pay can reach users in dozens of countries. Both are free to use when linked with a debit card or bank account, but P2P payments via Google Pay are no longer available in 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, Chase Bank, and Bank of America. In 2023, the company facilitated $806 billion in transfers with 2.9 billion transactions.

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

Zelle may be the biggest competitor to Venmo in the U.S., considering the size and scope of the client base for all of the banks involved in the Zelle partnership. Venmo averages around $65 to $75 per transaction, which could indicate that Venmo is used for smaller payments, such as meals, while Zelle is more commonly used for bills and rent.

Cash App

Built by Twitter, Inc. (now X Corp., owned by Elon Musk) co-founder Jack Dorsey, Block, Inc.’s Cash App offers free debit card-based transactions through its mobile app.

Meta

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

Is There a Monthly Fee for Venmo?

Venmo has no monthly fees, but it does charge a $3 sending charge for using a credit card.

Do You Need a Bank Account for Venmo?

To send or receive money using Venmo, you have to link a bank account.

Is Venmo a Safe Money App?

Venmo is as safe as using your debit card for online purchases. Your information is secured using encryption.

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.