Venmo: The Business Model and Competition

Venmo: The Business Model and Competition

By: Jonathan Chen


Venmo emerged as the most popular app for electronically transferring funds from one party to another in the last decade. Its exponential growth is driven by tech-savvy individuals who even use the app’s name as a verb, “I’ll Venmo you for lunch.” 

The inconvenience of finding the nickels and pennies to pay a friend back for a $11.47 movie ticket as well as society’s preference of digital currency over cash led to the development of Venmo. Venmo facilitates digital payments within a social network of known friends and people in a close geographical proximity. Similar services include Zelle, Google Wallet, and Square Cash. 

Similar to Facebook and Instagram, Venmo explosively grew through peer-to-peer networking. Users are attracted to the convenience of paying others with the click of a button. With the reputation of its owner, Paypal, and the advanced security settings, users entrust Venmo by connecting their bank accounts, debit cards, or credit cards. In doing so, users are able to make payments despite insufficient Venmo balances because deficit amounts are retrieved by the primary funding source. 

In spite of the immense popularity of the Venmo app, it still has its limitations. Venmo is a domestic app, so no transactions can be made outside the United States, even by an American user. Also, security still remains a concern for those skeptical of using a third-party platform. Another limitation is that Venmo is only available for personal use, thus businesses cannot directly use Venmo since they are linked to personal bank accounts or credit cards. Finally, Venmo is a free service that usually requires one to three business days to complete a transaction; however, transactions can be rushed immediately for a small charge. 

With all of these limitations, competitors have entered and will continue to enter this market. Basic microeconomic theory suggests that if a firm (Venmo) is earning profit (from the immediate transaction charges), eventually firms will enter the market since there are no barriers to entry. This principle has led to the emergence of Zelle, a digital payment service owned by major banks, including Bank of America, BB&T, Capital One, JPMorgan Chase, PNC Bank, US Bank, Citibank and Wells Fargo. 

Zelle’s launch in 2017 has led to a competitive industry; however, there are notable differences between the two electronic payment services. It directly addresses and fixes all of Venmo’s limitations. Unlike Venmo, Zelle can be used internationally if enrolled users have United States bank accounts. In addition, because Zelle is owned directly by some of the largest banks, it eliminates the need for a third party, providing a sense of security Venmo cannot. Zelle also encompasses business users, since it can be connected with a business’ bank account. Finally, Zelle transactions are immediate and free of charge since funds are automatically transferred between bank accounts. 

Venmo does offer an advantage, however, in that its users can take advantage of the app’s convenience without connecting a bank account. They can receive payments and use the funds they received from to make payments—Zelle doesn’t have this option. Nonetheless, experts and analysts predict that Zelle will overtake Venmo as the digital payment service with the most users in the near future, since it handles over $120 billion in person-to-person payments compared to just $62 billion for Venmo.  

Although I am a user of both services, I prefer Zelle to Venmo because the funds are automatically transferred between bank accounts. However, I use Venmo more often than Zelle because it is the more commonly used digital payment service between my contemporaries. Although I anticipate many users will begin to use both Venmo and Zelle, it seems unlikely that there will be a complete shift to a Zelle-dominated market given Venmo’s extensive popularity. I rarely find people who exclusively use Zelle—most have Venmo—but I find lots of people who exclusively use Venmo. Thus, I believe that users will begin to use Zelle while simultaneously continuing to use Venmo. 


Jonathan Chen is a writer for the Economics Student Society at Oxford College.


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