What Is Venmo?
Venmo is a peer-to-peer (P2P) payment app available on iPhones and Android phones that allows for the quick and easy exchange of money directly between individuals.
Founded in 2009, Venmo began as a text message-based payment delivery system. Then, in March 2012, the company introduced a platform with an integrated social network, in an effort to capitalize on the growing P2P economy. Less than six months later, Braintree, the mobile payment system utilized by Airbnb, Uber, and other e-commerce giants, acquired Venmo for $26.2 million.
Less than one year after that, Venmo enjoyed a substantial boost in users, when the payment company PayPal Holdings Inc. acquired Braintree for $800 million and rapidly monetized Venmo’s user base.
- Venmo began in 2009, with a text-message based peer-to-peer payment platform.
- Venmo launched a platform with an integrated social network in 2012.
- Sending money over Venmo triggers a standard 3% fee, but the company waives that expense when the transaction is funded with a Venmo balance, a bank account, or a debit card.
- The 3% fee is not waived when users send money from a credit card.
- Venmo is accepted as a form of payment by approximately two million online and brick-and-mortar merchants.
How Venmo Works
After installing the app on their phones, then linking their Venmo accounts to their credit card, debit card, or checking accounts, Venmo users can instantly begin exchanging funds among one another, with Venmo functioning as a virtual fiscal intermediary.
In other words, Venmo may be seen as a middleman between the two bank accounts of the two users conducting a payment transaction.
Consider the following scenario: Sally agrees to sell Mary a bracelet for $50. Instead of transacting with Mary’s bank account, Mary sends Sally the funds via Venmo, which then raises the balance in Sally’s account by $50, while reducing Mary’s Venmo balance by that same amount.
In this way, a Venmo balance is essentially a virtual ledger that represents funds trading hands, without actually executing transactions outside the Venmo platform. Therefore, until Venmo transfers the balance into the recipient’s bank, the money isn’t technically in that user's possession.
The Social Side of Venmo
Venmo has dominated the P2P payment market by making the transfer of funds a fun and interesting exercise. Users can jazz up the exchange by using emojis to describe the traded items in question. For example, if one friend fronts his pal the cost of a glass of wine, the friend can issue a Venmo payment, with the addition of a wine glass emoji, as a playful gesture.
“This takes the awkwardness out of asking your friend to pay back their portion of the bar tab, marrying the social element and the financial element,” explains Venmo spokesman Josh Criscoe.
According to Venmo’s website, there is ultimately no fee for sending money over the platform, if the money is funded with a Venmo balance, a bank account, or a debit card. But transactions financed with credit card payments trigger a standard 3% fee that originates with the credit card companies, which Venmo simply passes onto consumers.
Venmo derives a more significant pot of revenue from the per-transaction fees it charges merchants. Thanks to PayPal’s infrastructure, Venmo is compatible with at least two million merchants, consequently enabling Venmo to rake in two discrete types of income streams.
The first type of revenue is facilitated through a "smart payment button" that can be integrated into other apps, for in-app purchases. In 2018, Uber added a service that allows its app users to pay for rides and Uber Eats using Venmo, without ever leaving the Uber app. Furthermore, the cost of rides and food items can be divided among multiple users via the Uber app.
Venmo Debit Card
The second source of merchant revenue is derived from the Venmo debit card, which draws directly from a user’s Venmo balance. This card operates through Mastercard and can be used at any business that accepts Mastercard. This function has helped Venmo expand beyond its exclusive P2P platform, empowering customers to transact directly with online retailers and brick-and-mortar establishments.
In both revenue-generating scenarios, Venmo charges merchants a 2.9% fee, plus $0.30 per transaction. Companies are willing to pay these higher-than-average rates, due to the wealth of new customers Venmo brings to their doors. Furthermore, Venmo users are more likely to elevate the profiles of participating companies, over their social media accounts.
“Partnering with Venmo is like partnering with a credit card processor, but with much more upside,” notes consultant Richard Crone. “Retailers spend a lot of money trying to get you to like them on Facebook and follow them on Twitter. But they could get these things for free, as a byproduct of allowing Venmo payments. People can see where their friends have been and what they’ve been buying, which turns users into advertisements for businesses, among a highly desirable target demographic.”
Venmo boasted 40 million by the end of the fourth quarter of 2919. Its net payments volume grew to $29 billion, representing a 56% year-over-year climb. Projected revenues for 2019 were approximately $300 million.
Is Venmo Safe?
All internet-connected applications can be vulnerable to security breaches. Therefore, Venmo and other platforms directly linked to consumer bank accounts must be held to the highest safeguarding standards.
For this reason, Venmo uses data encryption technology to protect users against unauthorized transactions while storing user information on servers in secure locations. Venmo also gives users the option of setting up PIN codes for mobile applications.
Unfortunately, hackers and scammers have still been able to circumvent these precautions. After gaining access to a user’s account, hackers can easily transfer a user’s Venmo balance to a new bank account. And by changing the user’s linked email address, hackers can reroute a user’s transaction notifications, leaving them in the dark until the bank finally notifies them of balance changes, long after thefts occur. Stories of Venmo users losing up to $3,000 have been reported.
The Consumer Financial Protection Bureau is probing debt-collection practices at Venmo, which said on Feb. 5, 2021 that it received a “Civil Investigative Demand” from the CFPB “related to Venmo’s unauthorized funds transfers and collections processes, and related matters.”
How to Protect Yourself
Users can take the following precautionary measures to combat hacking:
- Never store large amounts of money in Venmo balance.
- Immediately transfer Venmo transactions to linked bank accounts.
- Only use Venmo to exchange funds with familiar people.
- Opt out of Venmo’s social network, by changing the setting to “private,” in order to cloak transaction histories. Otherwise, Venmo's default new account setting of “public,” enables the app to publish transactions on its public feed.
Settlements Over Privacy Issues
Venmo has been criticized for its slow customer service responses to these breaches. In 2016, Texas Attorney General Ken Paxton announced a settlement with PayPal Inc. regarding Venmo’s negligent privacy, safety and security practices. The settlement included a $175,000 payment to the state, as well as reforms to these practices.
In March 2018, Venmo reached a settlement with the Federal Trade Commission (FTC) concerning the company’s failure to disclose information to consumers about privacy settings. The FTC also found the company in violation of the Gramm-Leach-Bliley Act’s Safeguards Rule, which requires financial institutions to implement safeguards to protect the security, confidentiality, and integrity of customer information.
As part of the settlement, Venmo is subject to biennial, third-party audits of its compliance efforts for 10 years. Violations of these terms could result in a civil penalty up to $41,484 for each one. So despite Venmo's imperfect record, institutional and legal measures aim to remedy these shortcomings.