In these decades we are witnessing where humans as a species have made the maximum amount of inventions. We might not really think actively about this, but there is a lot of stuff that goes on behind the scenes and we just see the final efficient product in front of our eyes. Think about this, no one in the past has thought that we could travel with a computer in our pocket. We can ask our parents what it was like to live without phones, back in the day, that was a luxury. Today it is a basic necessity to have a smartphone and we cannot possibly imagine our life without that device. So many things have been made into easy, efficient processes, which we can witness today. We can have food delivered to your houses, we can have everything delivered to your doorstep. Everything is online and that world now rests on your palm.
One of the most notable advances in technology has been about sending money. Next only to the discovery of money, we can now transfer money digitally without physically being available with the next person. This is mind-blowing, to say the least. There have been a lot of apps that provide this service and they are in a very interesting business. This article talks about one such business, Venmo. Venom is not famous in India that much, but outside here, it is a rage. Let us see how they operate and what stands in their way to profitability.
About Venmo
Venmo by Paypal
The Origin
Issues with Venmo
The Profitability
About Venmo
The word Venmo is a mix of two words, first is Ve, Vendere (Latin), which means to sell. Another word is mobile which tells about the mobile nature of transactions and can be carried out by a smartphone. The app allows users to send and receive money in a hassle-free manner. All they have to do is connect that app to their bank account and they can send or receive money via their mobile numbers. Venmo has come a long way from being just a startup that had under 10 people to this mammoth app of transactions. This app has earned a lot of daily active users, and the reasons are many. Here we list some of the reasons behind the popularity of such instant money transfer apps
Convenient To Use
These sorts of apps are super handy and can free you from the hassle of being physically present at the payment place. You can just Venmo money to the other person easily. This convenience makes the app super famous and makes people use these two words often, ‘Venmo Me!’
Safe and Fast
Venmo is fast. You type the number, select the amount and whoosh! Money is transferred to the other person. This is fast and easy and reliable in a hundred per cent of the cases. This ease of transfer and the speed of payment makes this app a wide range of users. Also, it is free.
Free With No Hidden Charges
Venmo is free. What? Yes, this app lets you transfer money to someone in almost an instant and saves you the hassle of paying with cash. Adding to all these benefits, it is absolutely free. This is the most famous trait of these sorts of instant money transfer apps because people don’t wanna pay for payments. So Venmo wins a lot of users.
Venmo by Paypal
The parent organization of Venmo is Paypal. PayPal is the brainchild of Peter Thiel and earns money from merchants. It works as a payment processing middleman which is fast and reliable for users.
All we see is seamless payments to the app, what we don’t really see is the backend process. The backend process is big and tedious for data-driven companies. PayPal and Venmo are data-rich companies that are responsible for regulating and storing the data of not just thousands but millions of users. Let us see what are some issues with such models.
The Origin
Venmo was created in 2009 and the operations began shortly afterwards. The idea behind sending money instantly was so cool that many people jumped right into the app. They were the first users of Venmo and they created this chain of people who love to send money almost instantly. This is how the user base of this company grew. Watching its popularity and future prospects, there were people in the market who wanted to ride this bull run. So in 2012, Venmo was bought by Braintree. Braintree paid twenty-six million for that acquisition in 2012 and went on to use the operations and manage the company. What they did not realize was that the money they paid to buy Venmo was peanuts and beyond its capabilities.
Next year in 2013, as the user base grew, the valuations grew for Venmo. It was noticed by PayPal and they wanted to strike a deal. But now, they have to check and ask for Braintree’s permission for that. What they did was something unexpected. They bought the whole Braintree, not just Venmo. They completed this deal for a whooping eight hundred million.
Slowly the market for Venmo increased and it operated with more grace. More grace means more and more use of complex scientific technologies. In 2018, it was reported that Venmo touched transactions that totalled about sixty-two billion dollars. This was a jump of seventy-nine per cent from the previous year, which was 2017. With all these big numbers, the app has no profitability at all. It runs in deficit and the parent company, PayPal is not earning off of Venmo.
Despite all the distribution and daily active users, Venmo fails to become profitable up until now. All these years, from its inception to its user boom, the app, and the company has constantly seen failure in revenue generation. Let us see why it is hard for these businesses to earn money.
Issues with Venmo
Managing a company that deals in transferring highly liquid asset classes requires great feats in technology. Venmo has to have deep roots in data security so that it can have users’ data stored safely in the warehouse. Another thing is about maintaining such a big business, we require huge cash flows. All these issues are inherent to this business, and they have to be knocked off with the right methods. Here are some of the most inherent issues with instant money transfer businesses like Venmo.
Huge Amount of Data
Apps like Venmo have to deal with enormous amounts of data. Data of customers, merchants, banks, and accounts related to its users. The company has to not only have to manage the data related to all these accounts but also has to store it securely. The data has to travel fast so it can load and be used easily. Thus, requiring a lot of data security and top-notch infrastructure for managing that.
Law and Regulations
In most cases, that is almost a hundred per cent of the cases, apps like Venmo are not regulated by law. Unlike banks, apps like these operate on their own and create their own user base. They are built on the belief of people and they work on that only. No government or any authority looks into their matters or enforces what they say. They are solely working as themselves.
Profitability
Another huge issue with these businesses is profitability. Up until now, of all the apps that transfer money, not a single one of them is profitable. All these services are free and people use them on a daily basis. The thing is that at its core, no one really wants to pay for their faster, easier payments. Yes, these apps provide us with a lot of conveniences but they are not really what users would pay for. Or what most users would like to pay for, even when the price to use them is small or minuscule.
The Profitability
Venmo-like apps are all over the world but profitability still remains a big question mark. Venmo has everything that a business could earn, a healthy amount of daily active users, a great number of transactions, and technological efficiency. Despite all these pros, the profitability in this sector suffers the most. Let us see why they are not earning any revenue
Distribution Building
The first reason why companies like these or startups like these do not earn money or refrain from earning any money is distributed. The reason behind that is, they want to build a distribution first before moving into the revenue department. Building distribution comes at the top of their to-do list and the reason is simple. A good distribution system in place helps earn revenue in a much better way than the other way around. So they first focus on building a distribution that is healthy and robust in the future. This makes milking easy. Even in India, apps like those that deal in instant money transfers do the same thing. Apps like Paytm and Google Pay, all the participants in the market are fighting hard to build the most healthy and robust distribution. Once they are down with that, that is building a good number of user base or daily/monthly active user base. They can then use that crowd to generate cash flow by levying a small fee for transactions for each customer.
PayPal Company Profile – Founders, Business Model, Revenue
PayPal’s revenue in 2022 was $25.6 Bn. Here’s PayPal’s journey of leveraging and democratizing digital transactions across the globe.
Free of Cost
Yes, the apps make it convenient to transfer money, but their most famous trick of theirs is that they are free. Apps like Venmo are freely listed in the Google Play Store and iOS store as something of a fad. People like to use them and just close them, not pay or something to use them. This is what is a significant hindrance to their profitability. Maybe these companies will try to change that in the future but as of now, it is the same. These apps are free and that is why they are mostly appealed to the masses.
Merchants and Distributors
When we say that Venmo is not making money and only increasing expenses, we mean it really but there are some operations in which the case is different. Venmo makes money but very little, minuscule. They make this money from merchants who list their businesses on the app. PayPal is not so different in the league from the peer-to-peer money transfer app Venmo. PayPal in fact uses the same methodology to earn some petty cash and that too is reinvested in the business to make it utilized.
Banks
You go on to your Venmo app, select a contact, and send money, and the money is transferred. This is what looks like on the outside. However, there is also another side that no one looks at. At the backend, there is always some more work than it looks. When you transfer money to a friend the transaction is reflected at the same time on both accounts. But at the back end, it is done hours later in real life. Apps like Venmo use the help of banks to store money and transact the money. So with these partnerships also, Venmo makes a little money. However, this money is not much, and most of the time is reinvested in the business making little or no effect on future operations.
All these are ways or obstacles with which businesses like Venmo suffer. The company has been trying to build a good distribution for decades now. The reason is to have a strong user base so that when levied some fee, there exist, people, to pay. If there are not many users of the app, then the revenue prospects will be hugely affected. So it is prudent to build daily users first and then ask for a little fee for convenience.
Conclusion
Venmo, a subsidiary of PayPal, is a very famous tool for money transactions. Its features entail peer-to-peer payment transfers that an individual can use to send or receive money. Since its inception, the app has managed to grow steadily and reach a point where it has become a household name. ‘Venmo me’ has almost become a catchphrase in cities of their operation.
On the flip side, businesses like these suffer in money. The profitability of companies like these suffers in the name of distribution and user habits. Users of Venmo love the fast and convenience that they offer but on the same hand, they may or will get agitated when asked for a fee. They don’t wanna really pay for their payments and get it done fast. So, startups like Venmo take their time in building an infrastructure of distribution and then will use it to generate future cash flow.
FAQs
How is Venmo making money?
Venmo generates revenue through a 2.9% transaction fee for businesses. Venmo also charges a 1% fee for users who want to withdraw money instantly to their linked card.
Which is the parent company of Venmo?
Venmo’s parent company is PayPal.
Which Bank runs Venmo?
Venmo is run by Synchrony Bank.
What is the business strategy of Venmo?
Venmo makes money by charging members for using its “Pay with Venmo” feature. Venmo earns a fee from every instant transfer, interchange and withdrawal, and interest on cash.
What is Venmo’s competitive advantage?
Venmo facilitates digital payments within a social network of known friends and people in close geographical proximity. Unlike its competitors, Venmo doesn’t charge users to send or receive more money.
