How Does Venmo Make Money? Business Model of Venmo


How Does Venmo Make Money

Venmo is a peer-to-peer money transaction service that operates as a digital mobile app on smartphones and tablets. Using PayPal distribution of funds, Venmo allows multiple users to split a check or transfer funds without involving a bank.

But, how does Venmo make money? Venmo makes money through transfer fees attached to interchanging funds, withdrawing funds, exchanging cryptocurrency, and cashing checks along with commissions earned through affiliate partnerships.

Business Model of Venmo

Venmo’s business model operates as a peer-to-peer service for financial transactions. By using PayPal to exchange funds, Venmo allows people to bypass banking fees and unreasonably long hold times on transactions. In exchange, Venmo accepts a percentage-based commission fee based on each transaction.

How Much Does Venmo Charge for Transactions?

Venmo charges 3% for transactions. This percentage is low enough that most users won’t balk at adding the expense to their transaction, but high enough that Venmo can make a strong profit based on the exchange.

Venmo’s Digital Platform

One of the major reasons Venmo has managed to garner such great popularity in such a short amount of time is that it’s operated off a digital platform. This allows users to access the application directly from their phones or tablets.

Here are just a few of the business advantages Venmo enjoys as part of a digital platform:

  • Faster services: Thanks to their mobile app, users can access and use Venmo in a matter of seconds if they have the app downloaded on their phone. Fast access makes Venmo more popular as a fund-sharing tool, which increases the load of transactions performed on it.
  • Personalized content: Downloading the Venmo app allows users to participate in a personalized experience that helps solidify the brand and increase user immersion. Users can customize their Venmo experience by adjusting their profile information or applying for a Venmo credit card with personalized rewards.
  • Online and offline access: Even though Venmo is primarily a digital platform that operates online, it now has a Mastercard-branded debit card that allows Venmo customers offline access to the service.
  • Updates and push notifications: Push notifications allow users to know exactly when transfers have occurred on their Venmo account. This contrasts with traditional banks, where online registers may not accurately depict the user’s current funds.

Much of Venmo’s success as a business model stems from the company’s embrace of progressive practices and state-of-the-art technology. By keeping in line with current technological advancements, Venmo has effectively made itself more efficient than most banks manage as older financial institutions with ingrained outdated processes.

Venmo and Peer-to-Peer Service

Venmo operates as a peer-to-peer service as the primary aspect of its business model. Peer-to-peer (P2P) services help cut out third-party intermediaries by allowing users to conduct financial transactions strictly amongst themselves without the interference of a bank.

This P2P service helps prevent users from facing many of the built-in service fees that banks and credit unions have built into their transactional systems over the years. While Venmo users still have to pay a flat 3% transfer fee, this is much less of a hassle than dealing with the fees and holds associated with a bank.

Here are a few of the other services that Venmo offers as a P2P platform:

  • Payment processing: Using PayPal as a financial platform, Venmo allows individuals and businesses to process payments and fund transfers on a mobile platform. PayPal is a heavily encrypted online financial system, so it also has a lot of brand loyalty and trust with the general public.
  • Information on individual users: Venmo provides a way for users to keep up with other users that they have made transactions with in the past, which can be a helpful tool for small business owners in building their base clientele.
  • Private messaging: Even though Venmo is built for privacy, the application still allows users to communicate directly with each other via iMessage and other text chatting platforms that are baked into the software. Text messaging helps establish a history of the financial exchange and also helps prevent misunderstandings.

 

P2P services originated in digital file-sharing services like the original Napster program. In the decades since, P2P services have come to envelop a whole range of different social-sharing applications that allow users to exchange everything from money to romantic encounters.

For Venmo, P2P services are used by both individuals and small businesses as a way to move funds quickly and securely on the fly through a mobile financial system.

Venmo and PayPal

Much of Venmo’s financial success has sprung from its association with PayPal. Venmo was acquired by PayPal for 800 million dollars in 2013 when PayPal acquired Venmo’s parent company, Braintree.

By absorbing Venmo, PayPal allowed Venmo’s P2P service to flourish. PayPal was already a well-established online payment processing system adopted by online merchants, becoming the default payment system for online transactions.

Bringing Venmo into the fold gave Venmo access to PayPal’s established merchant reputation, its payment encryption software, and a host of other tools that made it easier for the company to grow through new marketing ventures and affiliate deals.

Through their business models, PayPal and Venmo both offer similar advantages to consumers:

  • Free access: PayPal and Venmo both have free software applications on iOS and Android platforms, making it easy for anyone to become a registered user of the payment system without having to jump through a bunch of hoops to do it.
  • Service standard: PayPal has developed a reputation of security to the point that consumers feel safer purchasing from a business if it has PayPal payment options. Since Venmo operates through PayPal, it offers the same level of financial security in its P2P transactions.
  • Simple, direct interface: Both PayPal and Venmo feature state-of-the-art user interfaces and software apps that are simple to use and easy to hook up to a credit or debit card. A new user can begin making Venmo transactions within minutes on the Venmo app even if they’ve never encountered the software before.
  • Uncomplicated fee system: Venmo and PayPal have proven that it isn’t the act of paying a fee that deters users necessarily, but the act of paying for multiple fees that are overly complicated or that sound arbitrary. By limiting transactional fees to a single transparent low-percentage fee, Venmo encourages customers to use it.

Taking advantage of digital tools and convenience-based software initiatives is one of the major cornerstone’s of Venmo’s success as a business model. Making the software easy to use has encouraged people to use it for everything from splitting the check at a bar to paying for independently-commissioned odd jobs.

How Is Venmo’s Business Model Different From PayPal?

Even though PayPal is the parent company of Venmo, the basis of the two business models is a little different. PayPal started out as a way for online merchants to process payments securely through a credit or debit card. As a company backed by The Bancorp Bank and Mastercard, it quickly gained a reputation for financial security. This encouraged more vendors to use it.

However, Venmo didn’t start out courting merchants. Initially, Venmo was conceived as a peer-to-peer payment processor that would allow friends and family to easily transfer money back and forth. For example, a parent would be able to Venmo their child money for college books, or friends could easily split a check while going out to eat.

It was only after Venmo began to expand that it began affiliating itself with the same business partners that already had a pre-existing relationship with PayPal. Venmo has a bigger social factor than PayPal. Because of this, Venmo acts as much as a marketing venue and social media feed as it does a strict P2P payment service.

 

How Does Venmo Make Money?

Venmo has a unique business model because up until recently, the company didn’t generate that much direct revenue. Most of the money Venmo has made since its inception has been through the following revenue streams:

Interchange Fees

Venmo charges a 3% fee for transferring funds between users. These fees act as both profit for Venmo and as a way for them to ensure the security of the transaction. Even though interchange fees mean that Venmo transactions aren’t free transactions, the convenience of peer-to-peer services makes them worth the money. 

 

Cryptocurrency Transactions

Venmo recently rolled out a “Cash Back to Crypto” feature that allows Venmo users to purchase cryptocurrency directly from their Venmo account and store it in a specialized crypto wallet on their Venmo. Like traditional transactions, Venmo also takes a small percentage on these transfers. 

 

Check-cashing Fees

Just like a traditional bank, Venmo charges a check-cashing fee to cash either with payroll or regular checks. Venmo charges 1% on payroll checks and 5% on all other checks, with a minimum $5 check-cashing fee. Venmo users can also cash their checks for free, but it requires a ten-day holding period.

 

Affiliate Commissions

Venmo has teamed up with various businesses that allow businesses to accept online payments through the Venmo service. This allows Venmo to collect profit from both the vendors that it teams with and from the users that take advantage of Venmo access.

Even though it doesn’t seem like the money Venmo generates through transactional fees would be enough to make the company profitable, you have to consider the sheer number of transactions being conducted through Venmo at any given time.

With over fifty-two million users and counting, those low percentage fees add up quickly. In 2020, Venmo processed 159 billion dollars worth of transactions. With exponential expansion every year since it was established, Venmo makes more money every financial quarter.

Does Venmo Re-Invest User Funds?

A popular rumor concerning Venmo’s business model concerns the company re-investing the user funds that are stored in its systems for stock revenue.

Contrary to this belief, Venmo doesn’t earn money “on the float” by re-investing user funds. Its business model is successful enough that it doesn’t have to take the potential risk. 

 

Venmo Funding, Valuation & Revenue

Venmo’s growth over the past several years has led to the company having a strong customer base going into 2022. Here are some of the most recent numbers concerning Venmo’s funding, evaluation, and revenue.

Revenue450 million (2020)
Customers52 million
Funding1.3 million
Number of investors10

 

Is Venmo Profitable?

The question of whether Venmo is profitable has been the subject of speculation for a long time. 

Venmo is not yet a profitable business yet. The app’s small transaction fees are a source of revenue, but not enough to cover expenses. The company has reportedly set a goal of becoming profitable by 2022. Raising fees could be key to helping Venmo turn a profit.

Venmo has definitely taken off in recent years and is bringing in some serious revenue while continuously adding more ways to make money.  Currently, Venmo is focused on user growth (not profits) as the company expects their user base to reach 100 million people by 2022.

Here are a few reasons why Venmo has managed to grow so quickly:

  • Social media aspect: A major facet of Venmo’s expanded profitability is its integration as a social media outlet. Businesses can advertise on Venmo through user social media feeds via word-of-mouth marketing. On the P2P side, this social media feature also attracts more millennial and Gen-Y users who value social and financial transparency.
  • Low overhead: Because it operates solely as a digital platform, Venmo doesn’t have to pay out services for office space, employees, and other overhead costs that can make brick-and-mortar companies less profitable. Instead, Venmo’s major costs come from server operation and maintenance.
  • Expanded services: As it grows in value, Venmo continues to expand the financial services it offers its users. This in turn makes the company even more attractive to new users who haven’t experienced it.
  • Affiliate action: By teaming up with other businesses, Venmo seamlessly integrates itself into the greater digital economy. Making it easy for users to utilize the Venmo system by advertising it with vendors encourages users to go with Venmo over other online payment systems.
  • Embrace of technology: Venmo has managed to stay on the forefront of evolving P2P services by using the best available software, servers, and technology to keep its services going. This makes Venmo easy to use, and more accessible to more users as a result. Making digital payments more convenient is a goal that appeals to all users.

 

Conclusion: How Does Venmo Make Money

By now you should have a pretty solid understanding of Venmo and how it makes money.

Venmo isn’t just a company worth investing in, it’s a business model worth emulating. Within just a few short years, Venmo has managed to become the biggest peer-to-peer transactional service in the world by taking 58% of the total P2P mobile payment platform market.

Thanks for sticking with me to the end! I’m glad we could clear up any confusion you may have had about Venmo. It’s not difficult when you look at each pillar individually and then put them together.

Understanding the post Venmo monetization strategy is definitely important as it will make you hold Venmo on a different level, or maybe even make you buy some Venmo stocks if they go public one day. I know that I’ve certainly changed my mind on Venmo.

Now, if you want to make us happy, share the knowledge you gained from it with your friends and colleagues. As always, thank you for reading.

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