Investopedia/Trevor Nath: How Safe Is Venmo And Why Is It Free?

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How Safe Is Venmo And Why Is It Free?

By Trevir Nath | Updated July 7, 2017 — 11:02 AM EDT
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The ubiquitous access to the Internet afforded by laptops, smartphones and tablets has laid the groundwork for many tech startups. Today, an individual can order a car through Uber, book a room through Airbnb, or reimburse a friend through Venmo with just a smartphone. With each company operating in the sharing economy, peers share the access to human and physical resources. This includes the modes of operation from creation to distribution and consumption of goods and services.

Founded in 2009, Venmo began as a payment system through text message. However, as the peer-to-peer (P2P) economy has grown, Venmo has capitalized on the opportunity by introducing the platform as a social network in itself. Within months of its launch in March 2012, Venmo gained enough popularity that Braintree acquired the company for $26.2 million. Braintree, operating as the payment system for apps including Airbnb and Uber, was later acquired with Venmo by payment tycoon PayPal Holdings Inc. (PYPL). Although Venmo has enjoyed rapid growth and popularity amongst millennials, recent security blunders have led consumers to question the safety of the mobile payment platform.
How Does Venmo Work?

Venmo simplifies money transfers between individuals, allowing consumers to pay back people in their networks for any number of reasons. A linked credit card, debit card or checking account is needed to use the service. Besides initiating payments, consumers can charge friends or receive payments that can then be stored as a Venmo Balance for use at a later date or cashed out immediately to a bank account. Like WePay and other payment platforms, Venmo has an application programming interface that allows websites and businesses to add payment services. Venmo can be downloaded on all major operating systems, and since 77% of Americans own a smartphone, it’s no surprise that in more than $1 billion in payments were made via the app in January, 2016 alone.
How Does Venmo Make Money?

As a free-to-use platform, Venmo generates revenue through transaction fees. While most free-to-use mobile apps turn to advertisements for revenue purposes, Venmo has managed to avoid this path. Many of Venmo’s services do not incur transaction fees, including transferring funds between friends through a major debit card or checking account. However, to cover processing costs, Venmo charges a 3% fee for payments by credit card. In comparison, Venmo’s parent company, PayPal charges a 2.9% fee for all debit and credit card transactions. While Venmo presently reports zero revenue, its current operations help extend the reach of PayPal, which generated $10.84 billion in revenue in 2016.
Is Venmo Safe?

A major drawback to rapid technological innovation is the growing penetration of security networks, and the increase in these issues shows that nothing connected to the Internet is completely safe. Applications that are directly linked to consumer’s bank accounts must be held to the highest security standards. In 2015, Venmo became the target of criticism due to security breaches of user accounts. Venmo uses bank-level security and data encryption to protect users against unauthorized transactions, and allows users to set up a PIN code for mobile application use for additional security. When all else fails and account information is comprised, users will only be liable for $50 worth of losses, provided Venmo is contacted within two business days.

While Venmo’s security and liabilities insurance protects against a majority of theft, a run of complaints left many skeptical about Venmo and other mobile payment applications. The complaints stemmed from the company’s inability to email users when important changes had been made to account information. Hackers could change users’ passwords or email addresses unbeknownst to the legitimate user until their funds were depleted. Along these lines, horror stories have been reported of users transferring funds in excess of $2,000 without notice. However, based on the majority of Venmo thefts, experts cite consumer error as probable cause.
P2P Payment Industry

With the volume of global P2P payments and remittances eclipsing $1 trillion yearly, the P2P economy has huge opportunities for growth. Estimates from 2015 suggests the mobile P2P market — which totaled a reported $5.2 billion in 2014 — is set to expand to $17 billion in 2019. Along with Square and Venmo, tech titans Alphabet Inc. (GOOG), Facebook Inc. (FB), and even Snap Inc (SNAP), have penetrated the mobile payments market as well. Facebook incorporated a money transfer service into Facebook Messenger, allowing users to link debit cards and transfer money as easily as sending a text. On Snapchat, users can simply type a dollar sign and the amount in the chat feature, confirm, and money will be sent from the debit card provided.

As consumers continue to embrace digital alternatives to payments by cash and check, user confidence in the security of P2P payments must increase. The Federal Trade Commission provides consumers with protection policies to losses incurred from debit or credit card theft. These laws, on top of company policies, insure the consumer from unauthorized charges. Additionally, emerging markets have large potential for adopting mobile payment systems, specifically in the realm of remittances, furthering the need for greater security as an unsecured globally integrated payment system could have huge ramifications. However, mobile payment platforms remain vulnerable amid an increase in Internet-related security breaches.
The Bottom Line

The prevalence of smartphones as well as the launch and flourishing of several tech startups, including Uber, Airbnb and Venmo, have helped create the sharing economy. The sharing economy encompasses the peer-to-peer production and distribution of goods and services. P2P payment services such as Venmo provide convenient alternatives to cash and checks. Millennials, in particular, predominantly use Venmo due to the app’s connectivity to Facebook and the ability to easily split the costs of social events. As the app continues to grow, the adoption of mobile payments by non-Millennials will require increases in security and safety.
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