Venmo — the app which saved us from the shortcomings of the regular commercial banks and other transfer providers (including its current owner). Its explosive growth is largely driven by millennials, and its name is even used as a verb — as in "I'll venmo you for the food." But how does it really work?
After PayPal Holdings Inc. (PYPL) acquired the digital payment app Venmo from Chicago-based company Braintree in 2012, it wasn't obvious what the big deal was - Venmo seemed to most users like just another version of PayPal. But On October 28, 2015, during a phoner after the third quarter earnings report, PayPal finally revealed their master plan: "Pay with Venmo," which would allow customers to use Venmo at retailers, and pay for merchandise on their phones instead of using cash or credit cards.
App-based peer-to-peer payment technologies that make life easier for quick payments to trusted friends, businesses, and even strangers in close proximity have been praised. Venmo, with its tagline “Share Payments,” is currently leading the race with rapid growth, while other players are trying to catch up. In an economy where cash slowly becoming obsolete, there was a need for electronic peer-to-peer payment systems as an alternative to checks, wire transfers, and ATM fees. With Venmo, people could pay each other almost instantly without writing or deposit checks, go to the ATM or make wire transfers for everything from restaurant visits to rent payments. That's what PayPal wants you to use Venmo for, and it seems they've succeeded.
Let’s look at what Venmo is, how it works, its business model, advantages, limitations, and competitors.
What Is Venmo?
In a nutshell, Venmo is a simple cashless and paperless digital payment service through a mobile app that replaces the traditional methods of cash, checks, or cards, within a social network of known friends, and to people in close geographical proximity.
Within just five months of its public launch in 2009, Venmo gained enough popularity to be bought for $26.2 million by Braintree, another major payment processing service with customers such as Uber and Airbnb, Inc. Later, PayPal purchased Braintree and became the owner instead of a competitor of Venmo. At present, Venmo is headquartered in New York.
For the fourth quarter of 2016, the app processed $5.6 billion in payments. This was a 126% increase year over year.
How Did Venmo Start?
Finding that writing checks or cash payments to each other was inconvenient, especially when all major day-to-day tasks were done through mobile, founders and former roommates Iqram Magdon-Ismail and Andrew Kortina built an innovative text message-based payment app in 2009. The payment system was further enhanced to add some interesting social media features and make it public, leading to the launch of Venmo. Due to its secure social media publishing transactions made to a network of friends, it quickly gained popularity, further bolstered by its convenient and charge-free offerings through a cash-less mobile-based app payment system.
How Venmo Works for the End-User
Here is a simple step-by-step process flow of how Venmo works for the end-user:
The feed published is secure and within a user’s network. It does not mention the amount of transaction only the two people involved and a text controlled by the user. This text field has apparently been flooded with emojis — and if we dare take people's emoji use at face value, there's seems to be a lot of pizza and alcohol related exchanges. (See also, How Safe Is Venmo and Why Is It Free?)
Initially, Venmo started with a text message-based payment method. The founders were quick to realize the power of smartphones and moved onto mobile apps. As time passed, further integration with social media engaged users led to exponential growth. Venmo secured initial funding of $5 million. In the beginning transactions from all sources (including credit cards) were completely free. However, Venmo was losing money on credit card transactions (for which they were charged a fee). The breakthrough decision to charge for credit card transactions, keeping debit cards and bank account-based transactions free, was a game changer, and in August 2012, Braintree bought Venmo for $26.2 million. The following year, Paypal acquired Braintree (including Venmo) for a whopping $800 million.
Why Is Venmo Becoming Popular?
Until recent years, most people have been comfortable with the traditional payment methods of cards, check, and cash. Venmo's founders spotted an opportunity and challenged this comfort level. Harnessing the power of social media connections, Venmo is viral by its core design. Like Facebook Inc. (FB), Instagram and WhatsApp, which grew exponentially using a network-based peer-to-peer connect philosophy, Venmo has also gained tremendous popularity. The social display of the payment feed encourages usage, and the “Bill Your Friend” concept allows indirect payment reminders, further encouraging transactions for payment collection. There are no charges to individuals to send or receive more money. This is one of the Venmo’s unique selling points over competitors which charge to receive money. Take note, though, that Venmo debit card/bank account-based payments are free, but credit card-based payments are charged.
Venmo is quick and painless (next business day credit to bank accounts, if cashed out before 7 p.m.), while other services have withdrawal charges and longer timings. There are no multiple steps for money transfers. One can still make a payment despite having an insufficient amount in Venmo balance, as the deficit amount is sourced from the linked primary funding source (bank account, credit card, or debit card). The mobile app is easy-to-use and easy sign-up/in using Facebook or email. One can pay a friend using a credit or debit card as a source, which been a big hit among teens and across college campuses. Payments can also be made even to those who don’t use Venmo, though the recipient will have to sign up to accept money. Other features such as "Nearby Payment," which allows payments to people outside your friends group, provided they are in geographical proximity and the “trust” feature for auto-pay for recurring payments, like the monthly share of rent, to a friend has also increased popularity.
In terms of safety, Venmo claims bank-grade security.
It also offers Venmo API and Venmo Touch which allow Venmo app and website users to pay each other within the realms of app/website usage. One cannot get overdraft protection/ facility, unless offered by the bank account or card set as a primary funding source on Venmo, and it's available for businesses to use.
Venmo is currently available only in the U.S., and no transactions can be made outside the U.S., even by American users. Security remains a concern for a lot of users who are still skeptical of mobile payments, despite all claims of top-end security settings.
If Venmo does not charge its individual users for sending or receiving payments, then how does it make money? Venmo API and Venmo Touch services let users pay with Venmo on other applications for which it charges the businesses a fee of 2.9%. The customer gets the benefit of free payments, and businesses get customers for that nominal fee. Venmo's other source of income is through a 3% fee charged for credit card transactions.
Google Wallet is the closest competitor to Venmo, and the two are very similar. Both are free and linked to debit cards or bank accounts, although Google Wallet will transfer the money directly to your account without having to "cash out." Google Wallet is also available in the U.K.
Apple Pay/Android Pay
Apple Inc.'s (AAPL) Apple Pay is a payment system for making purchases in stores and for apps, with a fingertip reader on iPhones. As expected, this may remain an iOS-only app, not available for Android users, but Google developed Android Pay, which is basically the same thing. For now, Apple Pay does not offer peer-to-peer transfers, but is rumored to exploring it.
Popmoney is similar to Venmo, but charges $0.95 to send money from a debit card or bank account. It's powered by Fiserv — a veteran bank technology provider.
Snapchat (SNAP) lets users send money to their friends over its app. There's no fee, and the weekly limit is $250. It can also take up to two days before the funds clear. Snapchat has been a huge hit among Gen Z, and it may be a strategy to tap into the younger market. (See also: Google's 80s-Themed Report on Gen Z Is Not Lit)
Squarecash was built by Twitter Inc. (TWTR) co-founder Jack Dorsey. It offers free debit card-based transactions through email or a mobile app.
Facebook recently launched a money transfer service via Facebook Messenger, which allows users to link debit cards and transfer money as easily as sending a text.
The earlier competitor — now Venmo's owner.
Overall, the payment space is going to get more and more competitive, enabling better features and greater convenience for users. On one hand, using social connections is a disadvantage as it is difficult for users to move from one platform to something new if all of their friends are on a site or platform. On the other hand, the convenience of apps and browser interfaces allow for a quick switchover. Remember, the once famous Orkut is now dead and Facebook may be the current leader but it is facing constant threats from instant messaging apps. Ultimately, end users will be spoilt for choice and it’s the businesses that will have to continuously innovate to keep a loyal user base.
The Bottom Line
Mobile is ruling the world, with millions of apps making lives easier and more convenient. Payment processing is mostly limited to cash and check payments (diminishing) and card usage (still high). Venmo and competitor offerings are attempting to replace these traditional and inconvenient methods and streamline e-payments with minimal or no charges. The field will continue to become more competitive with many new players coming in. New innovative features and social media connections will decide the winner in the future, with end users getting ample choice, convenience and freedom from charges.