By:  Ernest Saco

If you’ve ever gone out to eat with friends, chances are you’ve probably used Venmo.  Venmo is a social media smartphone application that allows you to send and receive money from your friends.  Sending and receiving money on the application is totally free; so how does Venmo make money?

When I didn’t know the answer to this I had assumed that Venmo did something called market arbitrage.  This is a fancy term I learned in my finance days.  The technical term of market arbitrage is “Purchasing and selling the same security at the same time in different markets to take advantage of a price difference between the two separate markets.”  If you like learning about boring financial terms you can check out Investopedia, which is where I got that technical definition.

However, in Venmo terms, I thought that Venmo held your funds for a few days, invested your money in the market, got a small return, and then released your money to your friend.  I was DEAD WRONG!  Venmo isn’t that sophisticated..

Venmo has 2 ways it makes money:

1.  Transaction Fee for sending money from your credit card.

Venmo transfers usually happen from debit card to debit card, or checking account to checking account.  When these transfers happen, there’s no fee, it’s absolutely free to both parties, just like handing someone cash.  HOWEVER, if you need to transfer money from your credit card to someone else’s bank account, then you’ll run into a 3% fee for that transaction.  That’s revenue stream #1 for Venmo.

2.  Merchant Fee From Businesses

Venmo is actually owned by PayPall (fun fact).  And Venmo actually offers the ability for Businesses to Accept Payments from people using Venmo.  So imagine you’re buying a delicious sandwich for lunch, just like Apple Pay, you would send the Venmo at the point of purchase to pay for your sandwhich.  Venmo then collects a merchant transaction fee from the business, so the end user still doesn’t get charged at all for using the app (just like when you use your debit card).  This option is only initially going to be available for online purchases and mobile app purchases, and the business needs to be a PayPal merchant, meaning they accept PayPal as a form of payment.  However, PayPal has big plans for Venmo and we may be seeing more and more businesses accepting this as a form of payment (goodbye wallet).

So there you have it, that’s Venmo’s business model.  Next time you send your friend some cash through the app, I hope you think of me.  😉