How does Venmo Make Money and Understanding Venmo Business Model

How does Venmo Make Money and Understanding Venmo Business Model

How does Venmo Make Money
How does Venmo Make Money

Venmo is I feel a made up name from the Latin word Vendo (To Sell – Verb), However, it feels like a stolen match from Spiderman’s Best Villain’s name – Venom 🙂 ! Venmo is to US citizens what FaceBook + PayTM is to Indian Citizens (in terms of social payment features).  Before moving on to How does Venmo Make Money or the Venmo Business Model, Let’s first have a look at Venmo Facts and Figures.

About Venmo, Funders, Founders and Facts

Founded in 2009, The idea was born when one of the founders forgot his wallet during a trip. The process of settling his debt was a considerable inconvenience, especially compared to the possibility of mobile phone–based transactions.  Their original prototype used to send money through text messages, but they eventually transitioned from text messages to a smartphone app.

As of 2018, Venmo did about $12 Billion worth of transactions, and has become a Verb of Sort – Google Me, FaceBook Me and Venmo Me (Good league to be in).

Venmo Founders: Venmo was founded by Andrew Kortina and Iqram Magdon-Ismail, who met as freshman roommates at the University of Pennsylvania.

Venmo Funding:   In May 2010, the company raised $1.2 million of seed money in a financing round led by RRE Ventures.  In 2012, the company was acquired by Braintree for $26.2 million.  In December 2013, PayPal acquired Braintree for $800 million.

How does Venmo Make Money

How does Venmo Work
How does Venmo Work

How does Venmo Make Money is a question that is asked by a lot of Venmo users.  Especially when there is zero fee for P2P transactions.  Before moving to How does Venmo Make Money, let’s first look at What is Venmo and Venmo Business Model!

What is Venmo?

Venmo is to US citizens what FaceBook + PayTM is to Indian Citizens (in terms of social payment features).  Venmo lets you use your mobile to:

  • Send money to / receive money from others (P2P – P2B)
  • Split bills
  • And have some fun while transacting – This feature is the news feed feature where people can just post similar to that of FaceBook and if they are in your friend list, you can view theirs and they can view your updates (read payments + updates) : This is something PayPal (it’s parent) and Banks could never achieve.

In simple words, 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.  Let’s look at the Venmo Business Model to understand How does Venmo Make Money.

Venmo Business Model

Venmo Business Model
Venmo Business Model

Business Model of Venmo is dependent on the nature of its business.  It’s a prima facie tech company with a back-end integration with payment clearing service providers i.e. Banks. You can consider its business model similar to that of a Bank minus everything except money transfer services plus the advantage of real-time settlement and near to zero fees.  Venmo Business Model is simple in terms of making money out of customers, it’s ZERO.

Yes, you got that right, it doesn’t as of yet make money from P2P transactions on the customer to customer side of the business.  Below are the various revenue lines that Venmo has:

  • Venmo IN App Payment API – Pay with Venmo
  • Credit Card Gateway Fee – TDR (Transaction Discount Rate of Merchant Discount Rate – MDR) Passed on to the customer

Let’s see how these revenue lines actually work in real-world scenario.

Venmo Business Model of IN App Payment API

Venmo Business Model is based on the fact that it is a tech (FinTech) company thus APIs are a normal lingo here.  They will try to make money from selling the subscription to their API on a Per Use Basis.  This works exactly like any other Payment Gateway (where MDR is not charged to the customer but to the entity using this API) and you can read more about it here in Payment Gateway Business Model.

Venmo Business Model of Credit Card MDR

Venmo Business Model is dependent on the Back End of Cards (Visa / Master etc.) exactly similar to that of Payment Gateways Business Model. The card issuer charges an X% of TDR to Venmo in order to process the transaction (if the user uses a Credit Card to pay someone via Venmo) and Venmo, in turn, charges X+Y% to the end user.

You can read about Credit Card Companies Business Model here.

These are the two primary cogs in the wheel of Venmo Business Model.  Now that you have got an idea about Business Model of Venmo, let’s take a look at How does Venmo Make Money.

How does Venmo Make Money via In-App Payment API?

I guess after reading Venmo Business Model you may already be guessing how do they make money.  Well, they make money primarily from the In-App Purchase using Venmo API.  Credit Card Transactions are a very small percentage of their overall income.  Let’s look at these revenue lines explained in detail below.

This is very simple; you must’ve seen this feature at checkout pages of e-comm websites etc.  There you are presented with a host of payment options (For e.g. Credit Card, Debit Card, Net Banking, Wallets, PayPal, Others, etc.) Venmo is just one of those modes.

Using Venmo, users on your websites, or in your apps have a chance to pay via Venmo which in turn can be paid through Credit Card, Debit Card, Venmo Balance (Venmo’s E-Wallet) or Net Banking.

Whenever the user selects Venmo as a payment mode, the API is fired and the entity using this API pays a certain MDR to Venmo.  Let’s take a look at the example below:

  • User A Buys something from XYZ.com for 1000$
  • A selects Venmo on the Checkout page and pays 1000$ via Venmo
  • Venmo give a True / False API Response to XYZ.com
  • com ships products / renders the services to user A on confirmation of payment from Venmo
  • Venmo deposits 970$ to XYZ.com post keeping its fee of 30$ (out of which appx 5$ goes to card merchant – VISA etc., 25$ goes to Venmo as revenue)

How does Venmo Make Money by Credit Card Transactions?

How does Venmo Make Money on P2P transactions even though they are free using Venmo for end users, this is only when a non-credit card source is used to fund the transactions i.e. Debit Card or the Bank Balance.  If you use a credit card to pay a friend, Venmo gets charged X% (typically hovers around 0.5-1.0%) and they pass that on straight to the user post adding their own margins.  As of now, they are charging 3% to users who use a credit card to send money to others.

This means that if you use Credit Card to pay a Merchant on the checkout page, this is free, but if you use Credit Card to pay someone directly, you will be hit 3% additional over and above the amount you are transferring.   This is How does Venmo Make Money on Credit Card P2P Transactions.

This is all OK!

But, is that it?  I don’t think So!

How does Venmo Make Money whenever your buddy pays you for that pizza slice or beer or both you receive notification that she’s just Venmo-ed you.  But what happens to that Venmo-ed amount?  You have two options there, either wire that money straight to your bank account or use that money to Venmo someone else.  Are you wondering How does Venmo Make Money on the float that they carry?

Well you should, because Venmo enjoys the first mover advantage of this service with a 40%+ market share so they must be having a tremendous amount of float right?  Wrong!

Because all of that money goes for liquid investments at ZERO RISK so that the money can be handed over the customer then and there if asked for.  The market regulator did not allow Venmo to invest that money even into ZERO RISK securities, but now that it is part of PayPal Inc. it does invest this into ZERO RISK securities to enjoy some bit of float.  How does Venmo Make Money on this float is clear as follows:

  • Venmo invests $1 Million into ZERO RISK securities
  • These instruments typically return 1-3% for the year on a rolling basis
  • Whatever duration this float is kept, it will pay out some money over and above the float amount

I hope now that you’ve understood How does Venmo Make Money and Venmo Business Model you should be able to understand how this compares to PayTM.  Please let me know in case you have any doubts about this.

Unicorn Economy
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