The Venmo Business Model – How Does Venmo Make Money?

Executive Summary:

Venmo is a digital wallet that lets users transfer money between each other using the company’s app. With Venmo, users can furthermore pay at selected merchants, either online (using the Pay With Venmo feature) or via the company’s debit card.

Venmo makes money via its Pay With Venmo feature, Instant Transfers, interchange and withdrawal fees, interest on cash, fees on cashing checks, as well as affiliate commissions from a cashback program offered to debit cardholders.

Founded in 2009 and headquartered in New York, Venmo soon became a hit with its predominantly millennial user base. In 2012, the company got acquired for $26.2 million by Braintree, which a year later was acquired by PayPal for $800 million. Close to 70 million people now use Venmo’s app every month.

What Is Venmo & How Does It Work?

Venmo is a mobile peer-to-peer (P2P) app that allows its users to transfer funds between each other. The app furthermore enables users to pay at selected merchants, split costs between them (for example when having dinner), or simply talk to each other.

In order to transfer funds, the two parties need to be registered as users on the platform. Venmo has a Facebook Messenger type feel to it, allowing users to chat with each other or send emojis.

The app is tied to a user’s bank account or debit/credit card. This allows them to transfer money from and to their Venmo accounts. Right now, Venmo can only be set up if the user has a bank account or credit/debit card from an American financial institution.

Consequently, businesses can also integrate with Venmo to accept payments through the app. Merchants have to adjust their existing PayPal Checkout configuration and simply add Venmo as another payment method. Example merchant partners include Grubhub, Uber, Poshmark, or lululemon.

Lastly, Venmo also offers a debit card that is connected to the app. The card allows users to make purchases in the ‘real world’, for instance at coffee shops or grocery stores. Furthermore, users can receive paychecks via the associated account and earn cash back at selected merchant partners.

A Short History of Venmo

Venmo was founded in 2009 by Andrew Kortina and Iqram Magdon-Ismail. The company was initially headquartered in Philadelphia, but soon after its inception relocated to New York.

Kortina and Magdon-Ismail met each other in 2001 during a freshman event at the University of Pennsylvania, their alma mater. Both majored in Computer Science, but Kortina later changed his major to Creative Writing and Philosophy.

The duo started their first company during their senior year. My College Post was a classifieds site aimed at, you guessed it, college students. Throughout the years, the pair continued to experiment with various ideas until adult life caught up to them.

Kortina moved to New York and became one of the first engineers at URL shortener (which was founded by betaworks). Magdon-Ismail, in the meantime, did software work for Ticketleap in Philadelphia.

In 2009, Magdon-Ismail paid Kortina a visit in New York. Unfortunately, he forgot to bring his wallet along with him, which forced Kortina to pay for the weekend. Fortunately, this little incident sparked the idea for Venmo.

The name for Venmo is a combination of the Latin word vendere (“to sell”) and “mo”, which stands for mobile. At first, Venmo was designed to allow users to send and receive payments via SMS. Soon after, their inboxes were filled with funny messages accompanying those payments.

The duo realized that the social aspect of the app was what attracted people to Venmo. They added in a social feed (similar to the one on Facebook), which allowed users to check for what purposes their friends were exchanging money. Magdon-Ismael’s old boss at Ticketleap became the company’s first angel investor.

In 2010, the team raised their first-ever official round of venture capital funding from RRE Ventures, betaworks (Kortina’s former employer), Lerer Ventures, Founder Collective, and more. The $1.2 million seed investment allowed both founders to pursue Venmo full-time.  

Until 2012, and for the first two years of full-time operation, Venmo remained in private beta. The app was only accessible via invite, which allowed the founders to focus on delivering the best possible product.

That strategy certainly paid off big time. When Venmo released to the public in March 2012, its product was already on pace to facilitate $250 million in payment exchanges for that year. Venmo’s team grew to over 20 people in the meantime.

A few months after the public launch, Braintree announced it would acquire Venmo for a combined $26.2 million. Braintree, a past darling in the FinTech world, was handling the payments backend for companies like Uber and Airbnb. The acquisition of Venmo was a result of its strategic initiative to establish a strong presence in the mobile payments space.

Just a little over a year later, in September 2013, PayPal announced it would acquire Braintree (and all its underlying assets, including Venmo) for $800 million in cash. Both Braintree and Venmo garnered a great reputation from the developer and consumer community, respectively. This led PayPal to allow both companies to operate under their own brand.

Both Kortina and Magdon-Ismael left the Venmo in 2014. Reports at the time stated that the founder seemed increasingly disengaged in meetings. Mike Vaughan, Venmo’s COO, took over the role as the company’s general manager.

The change in leadership certainly did not affect the company’s growth. Furthermore, being in PayPal’s ecosystem allowed them to tap into expertise and resources they otherwise wouldn’t have had access to.

For instance, in 2015, Venmo launched its Pay with Venmo feature, which allowed users to pay with Venmo at any merchant that is a PayPal partner. Being one of the FinTech industry giants, this move granted Venmo access to millions of new merchant partners.

Nevertheless, the company also had its fair share of controversies throughout the years. Users issued countless complaints in which they stated that they have been scammed by others.

Venmo has furthermore banned certain transactions due to the usage of inappropriate terms, such as Idek, which most internet users refer to as “I don’t even know”. Unfortunately, in Bangladesh, it is known to be a major terrorist organization.

Others have voiced concerns over the public accessibility of Venmo’s data. In 2017, Berlin-based researcher Do Thi Duc published a report that showed how easy it was to retrieve data from the company’s API. What she found was numerous instances of people breaking up, exchanging money for drugs, or getting caught cheating on their partner.

Despite some of these hiccups, Venmo has grown to become one of the largest peer-to-peer payment services in the United States, just behind Zelle or Square’s Cash App. Nowadays, Venmo processes close to 10 billion U.S. dollars – every month.

Close to 70 million people use the app on a regular basis. Plus, over 1,000 people are now employed by Venmo which operates out of four offices across the United States

How Does Venmo Make Money?

Venmo makes money via its Pay With Venmo feature, Instant Transfers, interchange and withdrawal fees, interest on cash, fees on cashing checks, as well as affiliate commissions from a cashback program offered to debit cardholders.

Let’s look into each of these income streams in more detail below.

Pay With Venmo

The Pay With Venmo feature allows users to make purchases at selected merchant partners using their Venmo account. Example partners include companies such as Foot Locker, Forever21, Urban Outfitters, and more.

Whenever users pay at one of those selected merchants, a fee is applied to the overall order amount. Venmo charges merchants 2.9 percent along with $0.30 per transaction.

The fee structure is in line with standard rates applied by payment processors such as VISA or Mastercard.

Merchants are willing to pay the fee because it widens the pool of available customers they can serve. Traditional banks are often not integrated with modern-day apps, which in some instances leaves Venmo as the only available payment option.

Furthermore, the transactions users conduct will be made visible in Venmo’s social feed (unless users opt out of publicly sharing that information). This grants merchants additional eyeballs and can act as a valuable marketing channel to increase their exposure.

Instant Transfers

In 2019, Venmo announced it would allow users to instantly transfer funds into their bank accounts. Normally, retrieving money from a Venmo account and transferring it to another bank would take 1 to 3 business days.

Venmo charges the user a 1 percent fee on the amount transferred. The minimum fee is $0.25 while the maximum fee is capped at $10. The money is expected to hit a user’s bank account within 30 minutes.

Interchange & Withdrawal Fees

Since 2018, Venmo offers its own Mastercard-branded debit card to everyone that possesses an account. The card allows users to conduct purchases in the ‘real’ world and pay for items using their Venmo balance.

By being connected to the app, users can, for instance, pay for a dinner using their card and then have the option to split that bill with friends.

Furthermore, if enabled, the card’s transactions will also show up in the user’s social feed. Similar to Pay With Venmo, this can act as another marketing channel for businesses.

Venmo makes money from the card by charging merchants interchange fees. These fees, in all likeliness, are split between Venmo and Mastercard. When retrieving cash, customers, furthermore, have to pay a $2.50 ATM Domestic Withdrawal Fee and a $3.00 Over the Counter Withdrawal Fee.

Cash A Check

In January 2021, Venmo launched a new service called Cash A Check. As the name suggests, users can use the feature to cash in pay or government stimulus checks.

Users need location services turned on, have either Direct Deposit enabled or own a Venmo Debit Card, and possess a verified email address.

Users then snap a picture of the check and let it be reviewed by Venmo. If approved, Venmo deposits the money into the user’s account.

Venmo charges 1 percent in exchange for this verification service. A minimum of $5 has to be cashed in.

Cashback Program

The debit card also comes with the possibility to earn various cashback rewards at selected merchants. Example partners include Chevron, Papa Johns, Target, Dunkin’ Donuts, and many more.

Cashback programs transfer a percentage of the overall purchase price back to the customer’s account. This, in turn, incentives customers to shop at these merchants.

The partner then pays the advertiser, in this case Venmo, a commission for referring that customer. How much Venmo makes on each purchase is subject to the overall transaction volume as well as the agreement between Venmo and the partner.  

Cash Interest

Venmo, just like any normal bank, uses the cash residing on its accounts to lend it out to other institutions, such as said banks.

They then collect interest from these institutions (also called Net Interest Margin). For 2019, according to Statista, the net interest margin for all U.S. banks was equal to 3.35 percent.

Venmo Funding, Valuation & Revenue

According to Crunchbase, Venmo has raised a total of $1.3 million across three rounds of funding. Investors into the company include Accel, Greycroft, Founder Collective, RRE Ventures, and many others.

Venmo was valued at $26.2 million when it was acquired in 2012 by Braintree. A year later, Braintree was acquired by PayPal for a whopping $800 million. It was not disclosed how much of those $800 were attributed to Venmo.

Today, PayPal chooses not to disclose the valuation it assigns to Venmo. Instead, Venmo’s valuation is already priced in the market cap that PayPal has amassed, which is equal to $220 billion at the time of writing.

PayPal CEO Dan Schulman stated that he expects Venmo to generate around $900 million in revenue for the fiscal year 2021.

Hi folks, my name is Viktor! By day, I lead a tech team of 10 for an e-commerce startup. At night, I work on expressing my weird thoughts through this blog. And if there's time, I cuddle my cat..