Venmo: harnessing social network for online payments

Venmo leverages the social network effect and aligns their business and operational model to create a new "social" payment

Venmo is a digital payment app that has gained widespread popularity in the US and is poised to change the payment infrastructure for the future. It launched publically in 2009, and within five months, gained enough users to be bought for $26.2 million by Braintree—another major payment processing service serving clients like Airbnb and Uber. Braintree was then acquired by PayPal, converting Venmo from PayPal’s direct competitor to its subsidiary (1).

Venmo’s growth has been extraordinary. Business Insider reports that quarterly peer-to-peer payments volume for Q3 of 2015 through Venmo had exceeded $2 billion, more than three times the volume in Q2 of 2014 (2). Although Venmo faces many strong competitors also going after the payment space, it differentiates itself from major players like Google Wallet and Apple Pay through seamless integration of its business and operational strategy to serve its core value proposition: making payment an easy and sociable experience. You know a company has made it when it becomes a verb; “Venmo me” is now often heard in place of “pay me back.”



“Social” Payments

Venmo’s homepage looks quite similar to the Newsfeed feature of Facebook, precisely for the same purpose: to create a livestream of friend-to-friend payment activities and to foster a social and “experience-sharing” atmosphere. The actual user interface is very similar to Facebook as well: one has a “homepage” and could add friends to grow your network. In contrast to other digital payment systems like Paypal and Google Wallet, transactions are very intuitive and simply require a few clicks, with the opportunity to use fun phrases and emoticons to describe the reason for payment. Even the simple blue and white backdrop and friendly font serves to create a less intimidating environment for users. All operational decisions align with Venmo’s mission to create the “social” payment experience.


The Network Effect

Similar to Facebook, Venmo’s overall strategy has been to serve the needs of its core customers for free, and then to harness their activity to create value for a different set of customers who are willing to pay. For Facebook, these paying customers are advertisers, while for Venmo, they are individual businesses who pay a 2.9% fee to use Venmo API to charge customers. Importantly, the more Venmo keeps its core users happy, the more users there will be and the more value created for its paying business customers. This traditional network effect, where the value of the service increases with the number of users, applies to both the core users who benefit from having more friends on the platform, as well as paying businesses who have access to a larger customer base.

This network effect creates a business model that is focused more heavily on the demand side (versus supply side, which creates economies of scale), feeding into Venmo’s operational focus on acquiring users through social appeal, ease of use and fee-free service. Importantly, there are no ads or other accessory services, with revenue only coming from the 3% credit card charge for users and the 2.9% fee for businesses. Rather than focusing on monetization, Venmo is strategically prioritizing user acquisition as it understands that monetization will naturally follow. Working to its advantage, furthermore, is the fact the marginal cost of obtaining each new customer through its digital platform is essentially zero. Expectedly, Venmo expanded quickly first into large coastal cities like San Francisco and New York (3).



Venmo has recently come under scrutiny with scammers taking advantage of the lag time between confirmation of a transaction on the Venmo platform and the actual back-end processing with the bank (4). Just as it has taken Facebook years and numerous ups and downs to gain the trust of its users surrounding issues of privacy, Venmo will likely have its own share of challenges around trust and security as it grows and scales. Nevertheless, its business and operational models are perfectly aligned for it to become a keystone platform that supports everyday users and merchants across the US and eventually the world.


(1) “Venmo: Its Business Model and Competition.” Seth, Shobhit. Nov 3, 2015. Investopedia.

(2) “The Future of Venmo.” Shevlin, Ron. Nov 18, 2015. The Financial Brand.

(3) “Cash is for Losers!” Gillette, Felix. Nov 20, 2014. Bloomberg Business.

(4) “Venmo Scammers Know Something You Don’t.” Griswold, Alison. Sep 15, 2015. Slate.



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Student comments on Venmo: harnessing social network for online payments

  1. Fascinating post Tina! I’ve wondered for a long time how Venmo makes money (or plans to in the future). The service is so widely used now that “venmo me” has become the payments equivalent as “google it” is for search! I like that they are focusing on user growth and developing this behavior where we rely on making so many payments through venmo to our friends. The next smart step is to convince users to make payments to businesses through it as well. Users are now quite comfortable with Venmo so I don’t see this being a huge problem. The hard part will be convincing businesses who have to pay the 2.9% fee. This charge is similar to credit card processing fees, which many businesses avoid by simply not accepting credit cards. If Venmo can offer additional value to businesses as well, I think it might entice them more. For example, if they could collect payment data across businesses and provide it to businesses, that would be very valuable data – similar to the type of data Nielsen gathers. Businesses could see what types of goods are popular at their competitors, average transaction size, etc.

  2. Interesting post! I wonder if Venmo will further their focus on social payments in the future. For example, on the current Venmo newsfeed, there is already transparency of payment descriptions among your Venmo friends as well as other Venmo users. Although some of these descriptions are not an accurate representation of what is being purchased (e.g. – nondescript emojis), others may communicate specifics such as “Rolling stone’s concert” or “Celtics tickets.” Akin to other social media sites, showing users that certain friends have paid (and are thus likley going to certain events) might inspire “meet ups,” greater volume of ticket purchases, etc…

  3. My last company was an investor in Venmo so I’ve been a user for years. It’s awesome to see how much the product has taken off, although I do feel like they could have had a much bigger exit. Another interesting use case for Venmo: my friends and I have used it to lend and borrow cash from one another. If one person has zero ATM fees, he’ll withdraw cash for the other person who immediately reimburses him on Venmo. We call it the Human ATM. 🙂

    1. nice

  4. I look forward to tracking how this progresses in the future. It will be interesting to see how many businesses begin to accept Venmo and how fast that number will grow. I also wonder how consumer behaviors will change as currently consumers can opt to use a credit card at businesses and typically receive rewards of some kind (cash back, points, etc.). Will Venmo’s value proposition and ease of operational use for those who link directly to a bank account offset the incentives of other payment methods? Or is there a limit to the volume/types of payments made over Venmo? (i.e. those typically made with cash to begin with or within a certain dollar threshold)

  5. Great post, Tina! I am one of the most frequent users of Venmo. I literally use it for every transaction with my friends. One of my main concerns, however, is security. I think Venmo doesn’t have a transfer limit. Also, every time I make a transaction, it doesn’t ask for a password or anything else. If someone loose his cellphone, anyone can make a transaction to other account from there. To make the business model rounded, I would add some security measures that don’t compromise the flexibility of the program.

  6. Very interesting post Tina!! I use Venmo here in the US, but I am impressed that there are not better alternatives in the market.. In Chile, every bank offers online instant payment / transaction using personal passwords and security tokens to increase the security that Rafael mentions. I can transfer funds to every bank at any time, with high security measures.
    I do not understand why this practice is so widespread in Chile and not here in the US.. Can it be a threaten for Venmo’s business model?

  7. Great articel Tina! You deserve your 8th comment.
    Building on Arturo’s point, besides defending the US market, I would also be curious how Venmo could scale internationally (the question you raise at the end of your post). Are the more advanced online banking systems too much of a entry barrier or does the network effect alone create enough value for consumers? Could they integrate more with Facebook to make it even easier to adapt?

  8. Tina, I loved your post! I didn’t know that Venmo’s revenues are purely driven by businesses willing to pay the 2.9% fee. I’ve only used Venmo for peer-to-peer transactions, and I’d be curious to know the breakdown of its transaction traffic (peer-to-peer vs business customers). I completely agree that one of the main reasons Venmo has become so popular is the social element: it’s entertaining to see who your friends are paying/being paid from, and the opportunity to like or comment on posts adds to the consumer experience. Do you think the value created by the social experience will translate to the revenue-producing, business customer side? Given that the social aspect has been a significant part of Venmo’s peer-to-peer success thus far, I’d imagine that the business cares a lot about maintaining this identity.

  9. Awesome read Tina! It’s extraordinary how Venmo has grown over the past few years and how as you said, has become a verb synonymous with paying people back. I do wonder about its future through. I see Apple Pay and Google Wallet as considerable threats as they hold the capital to scale and have consumer trust already on their side. Plus, I wonder if people are growing a bit more cautious about making payments to friends a social experience, as some people may value privacy more than convenience or the social factor.

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