How Does Venmo Work And Is It Safe?
Cathie Ericson5-minute read
April 02, 2022
Chances are good you’ve heard somebody say “I’ll Venmo you” when you’re splitting a restaurant check or buying a group gift. If you have no idea what they’re talking about, this article might change your life. That’s because Venmo is a mobile app that has made paying for things easier than ever.
What Is Venmo?
Wondering what Venmo is and how it works? It’s what known as a “peer-to-peer” (P2P) payment app that you install on your smartphone or other mobile device that allows you to make or receive payments quickly and easily (and free, but more on that later).
Although it’s only recently become the method of payment choice for many, it actually began in 2009 as a text message payment system and then launched a platform of its own in 2012. Shortly after, it was acquired by Braintree, a mobile payment app popular at the time, which was subsequently acquired by PayPal, another payment app you might be familiar with.
How Does Venmo Work?
By connecting the Venmo app to a bank account (checking or savings) or credit or debit card, users can send funds to pay a bill or receive money by “requesting” it. While it’s most often used between friends and family members, it’s also accepted by many merchants.
The Venmo platform comes in handy when you want to charge someone for their share of your dinner tab or pay them for the concert tickets they bought you. As long as the other person has a Venmo account, you can use it to pay for services, like babysitting or housecleaning, or to send someone a birthday surprise.
But no money actually changes hands, since the Venmo transaction takes place between the two banks that are involved. Say you’re splitting a dinner bill and your share is $25. You can send the $25 to your friend via Venmo and your Venmo balance will go down by $25 while his will rise by $25 instantly. So you can leave those funds in your Venmo account to use for future transactions or you can transfer money to your bank. Think of it like a ledger that’s accounting for money going in and out via your use of the app.
To start using Venmo, all you have to do is download the app and connect it to your bank account or credit card by following the instructions on the app. It becomes part of your “mobile wallet,” which means that you can make payments for things conveniently right from your mobile device.
But Venmo has another fun side, since it functions a bit like its own social media channel. When you send your pal the $25 for the dinner bill, you can add an emoji like a salad or burger along with the amount. You also can view other exchanges from people you know when you scroll through your “activity” feed, where you can see what your friends were sent or paid. (Be prepared to potentially have a bit of FOMO though – fear of missing out – when you see that a gang all grabbed pizza without you.) You can also make those settings “private” if you don’t want people to see whom you’ve paid and what for.
You can add friends to your Venmo app to ensure that you’re paying the correct person for your purchase, although you can pay anyone via Venmo, even if they are not your “friend.” But always be careful when making a transaction that you are sending it to the right person; if you send it to the wrong “Susie Robinson,” Venmo will not reimburse you. It’s wise to add a photo to your profile so your friends know they’ve found the right person.
Is Venmo Free To Use?
Hard to believe, but yes, in general Venmo is free to use when you use it on a “P2P” basis, exchanging money among people you know. But, something this cool has to be funded by someone, so there are some cases where fees are charged. These transaction fees are primarily how Venmo earns money. Consider the following:
Instant Transfer Fees
Need money in the bank rather than your Venmo account? You may be wondering how fast Venmo works. You can transfer money from your Venmo wallet to your checking account for free if you are able to wait 1 – 2 days, but if you want it to transfer instantly there is a 1% charge.
You can make your Venmo payment from a bank account or debit card that’s linked to your account at no additional charges. But if you choose instead to link a credit card to Venmo, it will incur a 3% processing fee for your charges. While it actually is levied by the credit card company, not Venmo, the company will pass it on to the user. Note that if you have initially set up your Venmo account with a credit card, but you have built up your account through transactions being paid to you, those transactions will not incur the credit card fee. Say that you owe someone $50, but you have $75 in your account from past exchanges. That $50 would come out of that reserve, rather than hit your credit card. But if you paid someone $100, that would take care of the $75 that was your Venmo balance and also charge $25 to your card.
While technically designed for P2P transactions, millions of merchants accept Venmo as well. While paying a merchant is free for you, those who accept payment through the Venmo app will owe a 2.9% transaction fee, and an additional 30 cents per transaction, similar to if they accepted a credit card.
How Does The Venmo Debit Card Work?
Venmo also offers its own debit card, which is linked to your Venmo account balance and can be used to pay for items in stores. The card works on the Mastercard network and is accepted everywhere that takes Mastercard, including ATMs.
Is Venmo Safe to Use?
Even if it seems reckless to send real money through an app, Venmo is relatively safe to use. That’s because it uses data encryption technology to protect your account information, which means no one else can access your credit card or bank account. If you want an extra layer of security, Venmo gives users the option to set up a PIN code for logging in, as well as a thumbprint scan option for mobile devices that allow it.
Of course, users always should be aware that as with any digital or mobile transaction, there is a risk of a data breach. That’s why it’s smart not to store large amounts of money in your Venmo app, but instead to transfer it to a linked bank account. In addition, as mentioned before, you want to make sure you know the person you are sending funds to before transferring money.
How Does Venmo Work With Taxes?
If you’re just using Venmo to buy your friend a latte or sell your old skis, you’re safe, as it’s not necessary to report P2P payments to the IRS. But if you’re doing business on the app, you might need to report business transactions done over Venmo that surpass a certain threshold on your tax returns. For the most recent tax year, that amount was over $20,000 in gross payment volume and over 200 payments in one calendar year.
If you’re considering new ways to make payments, P2P apps are an easy, fun and relatively safe way to do so, and Venmo is a great choice since it’s essentially free.
Just remember that it’s real money you’re transferring around, and as you know, those happy hours and personal services can add up. Want to know more about budgeting, payment options and other financial topics? Read about more topics on our Learning Center.
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