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.

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 in close geographical proximity.
  • Unlike its competitors, Venmo doesn’t charge users to send or receive more money, although credit card-based payments are charged.

Venmo Business Model

Although Venmo does not charge individual users for sending or receiving payments, nor does the company charge any monthly or annual fees. Venmo generates income through Venmo API and Venmo Touch services, which let users pay with Venmo on other applications, for which it charges a 2.9% fee to businesses. The customer enjoys the benefit of free payments, while businesses acquire customers for that nominal fee. Venmo's other chief income source is the 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.

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:

Venmo
Image by Julie Bang © Investopedia 2019

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

Why Venmo Is Popular

Like Facebook Inc. (FB), 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 pay their share to the landlord via Venmo.
  • Users can make payments despite having insufficient Venmo balances because the deficit amounts are retrieved from a primary funding source, whether it’s a savings account, a credit card, or a 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 friends 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 only available for personal use, linked to personal bank accounts or credit cards. That means that businesses cannot directly use Venmo. A final limitation is that users are capped to sending a maximum of $6,999.99 per week, on a rolling basis–the same goes for receiving. 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 viewing 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 is also the most similar. Both are free, and both link to debit cards or bank accounts, but Google Wallet is also available in the U.K.

Apple Pay/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 not available 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, there are 837 partner financial institutions, including Wells Fargo, J.P. Morgan, and Bank of America. In 2019, the company facilitated $187 billion in transfers with 743 million 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. Zelle’s average transaction value is approximately $300, according to PYMTS.com, based on the last available data.

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.

Square Cash

Built by Twitter Inc. (TWTR) co-founder Jack Dorsey, Square Cash offers free debit card-based transactions through email or a mobile app. There are no fees for personal payments for Square Cash. Businesses can also use the service but must pay a 2.75% fee to receive payments.

Facebook

Facebook also has a free money transfer service via Facebook Messenger, which lets 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 can replace checking and credit card use with minimal or zero cost electronic peer-to-peer transactions. The field will continue to become more competitive, as new players enter the race.