How does Venmo make money?
Venmo is a mobile app that allows customers to send money to other people or businesses.
Users do not pay to send or receive money through the app, but the company makes money from interchange and withdrawal fees, Cash a Check and Cashback programs, and cryptocurrency charges.
What is Venmo?
Venmo is a peer-to-peer money transfer program that allows users to send and receive money between relatives, friends, and companies in real-time.
The startup was launched in 2009 to allow users to send and receive money via SMS (short message service), a text messaging technology.
Iqram Magdon-Ismail and Andrew Kortina, who were roommates at the University of Pennsylvania at that time, launched the service in 2009.
The arrangement was for a text-only money transfer service at the time. Later, in 2012, it was made available to the general public as an app that could be used on Android or iPhones.
Venmo was able to connect people's bank accounts and credit cards to the app through peer-to-peer marketing.
A card is not required. You only need a credit card that can be linked to the app to get started.
In 2013, PayPal bought the company, which has subsequently evolved into a platform for all forms of payment processing, including individual transfers and commercial services.
There is no online account management because the app is only for mobile devices.
How does Venmo work?
After installing the app and linking their Venmo accounts to their debit card, credit card, or bank account, Venmo customers can start exchanging money right away. Venmo serves as a virtual financial middleman.
To put it another way, Venmo acts as a go-between for the two users' bank accounts involved in a payment transaction.
Consider the following example: Jude accepts John's offer of $50 for a pair of sneakers.
Jude transfers the funds to John using Venmo rather than using his bank account, which improves John's account balance by $50 while reducing Jude's Venmo balance by the very same amount.
As a result, a Venmo balance is essentially a virtual ledger that represents monies changing hands without forcing users to conduct transactions outside of the Venmo platform.
The money is technically not in the recipient's hands until Venmo deposits the balance into his or her bank account. Employees can also collect their salary and business owners can collect payments via Venmo.
A Brief History of Venmo
Venmo was founded in 2009 by Andrew Kortina and Iqram Magdon-Ismail. The corporation was formed in Philadelphia but soon migrated to New York.
Kortina and Magdon-Ismail met during a freshman event at the University of Pennsylvania in 2001. Both have a Computer Science degree, however, Kortina eventually changed to major in Creative Writing and Philosophy.
During their senior year of high school, the two started their first company. My College Post was a classified ad website geared toward college students.
Over the years, they both persisted in experimenting with various concepts until adulthood captured them.
In 2009, Magdon-Ismail paid a visit to Kortina in New York. Unfortunately, he forgot his wallet, leaving Kortina to cover the weekend expenses. Thankfully, this tiny occurrence sparked the development of Venmo.
Venmo is a combination of the Latin verb vendere, which means "to sell," plus the suffix "mo," which means "mobile."
Venmo was originally designed to allow users to send and receive payments via text message. Their inboxes were rapidly bombarded with interesting comments in response to those payments.
Venmo's social feature was what brought people in, according to the duo. They included a social feed, comparable to that of Facebook so users could see why their friends were trading money.
RRE Ventures, beta works (this was Kortina's former employer), Lerer Ventures, and Founder Collective helped the team raise its first round of venture capital funding in 2010. Both founders were able to focus solely on Venmo thanks to the $1.2 million startup financing.
For the first two years of continuous operation, Venmo was still in private beta. The software was initially only available via invitation, allowing the founders to focus only on creating the greatest possible product.
That method was unquestionably successful. Venmo first started in March 2012, and before the end of the year, it had processed $250 million in payments. In the meantime, Venmo's staff has grown to nearly 20 members.
Braintree announced the purchase of Venmo for $26.2 million a few months after the initial public offering.
The backend payments for companies like Uber and Airbnb were handled by Braintree, a former FinTech favorite.
PayPal bought Venmo as part of a larger strategy to have a strong presence in the mobile payments market.
In September 2013, PayPal announced that it will purchase Braintree (together with all of its core assets, including Venmo) for $800 million in cash.
Braintree and Venmo, respectively, have a large developer and customer following. PayPal was able to operate both companies separately as a result of this.
In 2014, both Kortina and Magdon-Ismael laid back from Venmo. According to accounts at the time, the founder was becoming increasingly disengaged from meetings. Venmo's chief operational officer, Mike Vaughan, had been promoted to general manager.
The company's growth was unaffected by the change in leadership. Furthermore, being a part of PayPal's ecosystem gave them access to skills and resources that they would not have had independently.
Venmo, for instance, released its Pay with Venmo function in 2015, allowing customers to pay using Venmo at any PayPal-affiliated shop.
As a result of this move, Venmo, as one of the FinTech industry's heavyweights, received access to millions of new retail partners.
Despite this, the corporation has been the subject of some controversy throughout the years. Several users complained that they had been deceived by others.
Venmo has also banned certain transactions owing to the use of offensive phrases like Idek, which most internet users translate to "I have no idea." Unfortunately, it is well-known as a prominent terrorist organization in Bangladesh.
Others have voiced concern over the public availability of Venmo's data. In 2017, Berlin-based researcher Do Thi Duc issued a study revealing how easy it was to get data from the organization's API.
Many people were divorcing, exchanging money for drugs, or being found cheating on their relationship, she learned.
Venmo has grown to be one of the most popular peer-to-peer payment platforms in the US, behind only Zelle and Square's Cash App. Each month, Venmo handles about ten billion dollars in payments.
Nearly 70 million people use the app regularly. Venmo presently has over 1,000 employees spread across four offices in the United States.
How does Venmo make money?
Following the creation of a Venmo account, you will be able to submit payment details, such as a US bank account or a debit/credit card, and begin exchanging.
How do they make money when both opening an account and using the Venmo app are free? Fortunately, the company has established a solid business model and found multiple revenue streams.
These are some of them:
1. Feature of Venmo Pay.
Pay With Venmo allows customers to use their Venmo account to make purchases at specified merchant partners. Foot Locker, Forever21, and Urban Outfitters are among the partners.
A charge is added to the total amount of the purchase when users pay at one of those handpicked merchants. In addition to $0.30 for every transaction, Venmo charges businesses 1.9% of the transaction amount.
The fee system is similar to that of payment processors like VISA or Mastercard.
The cost is acceptable to merchants because it increases their consumer base. In other cases, traditional banks are not connected with modern-day apps, leaving Venmo as the only payment option.
Additionally, unless users opt out of publicly sharing their transactions, their transactions will be available on Venmo's social network. It broadens merchant visibility and can be an effective marketing tool.
2. Cashback Option.
At selected businesses, the debit card offers a variety of cashback advantages. Some of the brands that have worked with them include Chevron, Papa John's, Target, and Dunkin' Donuts.
Cashback programs credit a portion of the entire purchase price to the customer's account. This encourages customers to do business with these businesses.
The advertiser, in this case, Venmo, is then compensated by the partner for referring the customer.
The overall volume of transactions as well as the parameters of the partnership agreement influence Venmo's profit margin on each purchase.
3. Interest and Fees on Credit Cards.
Venmo Visa and Venmo Visa Signature credit cards are available to qualifying clients. Depending on the account type, cardholders pay annual percentage rates (APRs) that are equivalent to the prime rate plus 11.99% to 20.99%.
On cash advances, Venmo charges the prime rate plus 20.99% APR, and also cash advance transaction and penalty fees.
4. Fees for Interchange.
Venmo charges retailers interchange fees when consumers use the Venmo Credit Card to complete purchases, this is despite charging customers interest on credit card purchases.
A percentage of the transaction amount plus a tiny flat cost make up this price.
5. Fees for Withdrawals.
Venmo customers who need cash quickly can utilize a Venmo Debit Card to withdraw cash from any ATM.
Customers who withdraw cash with their debit card incur a $2.50 ATM Domestic Withdrawal Fee and a $3.00 Over-the-Counter Withdrawal Fee.
6. Immediate Transfers.
Venmo Instant Transfers, a feature launched in 2019, allows users to transfer the money instantaneously from their Venmo accounts to their bank accounts.
Venmo Instant Transfer funds are available within 30 minutes, rather than the one to three working days it takes to transfer funds to a bank account.
Venmo earns money by collecting a fee of 1.5% of the amount sent for Instant Transfers.
Users must pay a $0.25 minimum instant transfer fee, however, no more than $15 per transfer is charged. Users can still make standard electronic withdrawals for free.
7. Cash a Check feature.
Cash-a-Check, a new Venmo service, allows users to cash their wages and government stimulus checks. Venmo takes 1% of all payroll and government checks, and 5% of all other approved checks.
Checks must be worth at least $5 and no more than $5,000. Users must have a confirmed email address and activate direct deposit or have a Venmo Debit Card to use this function.
8. Fees for cryptocurrencies.
Venmo earns money by charging transaction and exchange fees on the buy and selling of bitcoin, in addition to its usual money transfer services.
The costs imposed on these transactions vary depending on the magnitude of the transaction. Venmo, for example, charges a $0.50 minimum fee on all transactions up to $24.99; 2.3% of purchase or sale amounts up to $100, 2.0% up to $200, and lower rates as the transaction size grows.
The exchange rate for currency comprises a spread that Venmo earns for each transaction, according to Venmo's website.
Venmo appears to be a great all-around money transfer option, but it does have certain downsides. The main disadvantage of Venmo is that it is only available in the United States.
No transactions can be carried out outside the United States or with non-US citizens. Venmo is mostly restricted to personal use.
Businesses are unable to utilize the app directly, but business owners can use it for certain things.
The final restriction is a weekly spending limit of $3,000 for each individual.
Competitors of Venmo
The following are some of the e-wallet services that compete with Venmo for market share.
Google Pay. Google Pay, which is Venmo's closest e-wallet competitor, allows users to connect their bank account and credit or debit card to the site. However, Google Pay has an advantage because it is available worldwide.
Apple Pay. Apple Pay is becoming increasingly popular in the United States and Canada. It's available worldwide, just as Google Pay, with substantial market development in nations like the United Kingdom and Australia.
Apple Pay is compatible with all iOS devices and uses the device's fingerprint sensor to verify the user's identification during the transaction.
Zelle. Zelle is a cash payment app that has a lot of features in common with Venmo. The payment app, on the other hand, is owned and managed by a collection of US-based banking institutions.
Cash App. Square was started by Jack Dorsey, the founder of Twitter, as a payment alternative to PayPal. Through the company's mobile app, it uses its "Cash App" platform for free debit card transactions.
Is Venmo secure?
Any application that is connected to the internet is vulnerable to security breaches. As a result, Venmo and other sites that are directly linked to consumer bank accounts must conform to the strongest security standards.
Venmo safeguards users' data from illegal transactions by encrypting it and storing it on secure servers. Venmo customers can also utilize the Venmo website to generate PIN codes for mobile apps.
Unfortunately, hackers and scammers have managed to get through these measures. Once hackers obtain access to a user's Venmo account, they can effortlessly transfer the cash to a new bank account.
Hackers can also reroute a user's transaction notifications by changing the user's associated email address, keeping them in the dark about balance changes before the bank tells them, which could happen months after the crimes.
Users have reported losing up to $3,000 in Venmo payments.
How do you protect your Venmo account?
Users should take the following actions to avoid being hacked:
Immediately transfer Venmo transactions to linked bank accounts.
Keep a small amount of money in your Venmo balance at all times.
To opt out of Venmo's social network and obscure transaction records, change the setting to "personal." The "public" setting on new Venmo accounts permits the app to broadcast transactions to its public newsfeed.
Venmo should only be used to send money to people you know.
What is the attraction of Venmo?
Venmo's appeal as a payment app is significant, and it appears that the fundamental reason is that it is more pleasurable to use than other apps.
Users can engage with one another, in the same manner, they would on a social media site with the app. Emojis are used extensively throughout the app.
Although transferring or requesting money might be unpleasant, cheerful and entertaining exchanges can help lighten the situation.
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