Venmo is very popular among young people as a means of exchanging money, and because it is both social and removed from cash, some interesting behavioral economic phenomena apply. My theory is that using Venmo increases consumer utility by reducing the pain of spending money in a few ways. 

An existing body of literature reveals that spending "hurts" us less, and we spend more, when we use mediums of payment removed from cash. The mobile payments app Venmo is 2 steps removed from cash: You link your Venmo account to your bank account or credit/debit card, and typically hold a balance in your Venmo account which can be "cashed out" to the bank account. Venmo money comes to feel like a separate, less money-ey kind of money.

For those unfamiliar with Venmo, it is a social mobile payments app. There is a feed of transactions that your Facebook friends are doing, as it uses Facebook for your identity. These transactions must have a subject line, which users typically take as a chance to flex their wit. Venmo suggests emojis that go along with common subject lines, like "food", "massage", furthering the suggested whimsical aspect of subject lines. 

First, let's go over some of the mental factors at play when you spend money.

Cognitive Biases for Spending

Credit Card Premium

One well-known paper on the impact of using credit cards on spending is "Always Leave Home Without It: A Further Investigation of the Credit-Card Effect on Willingness to Pay" by Dazen Prelec and Duncan Simester. 

"Since the 1970's there has been growing evidence supporting the frequently heard conjecture that credit cards encourage spending. For example, it is known that people who own more credit cards make larger purchases per department store visit (Hirschman 1979), and that restaurant tips are larger when payment is by card (Feinberg 1986). There is also evidence that credit card users are more likely to underestimate or forget the amount spent on recent purchases (Soman 1999)."

They cover existing research pointing to the existence of a "credit card premium", which increases users' willingness to spend merely by the presence of a credit card. Prelec and Simester go on to conduct two studies of their own, both of which show users willing to pay a premium for credit card payments. Specifically, MBA students were willing to pay a premium of 64% for tickets of an unknown value if they paid by card ($41) instead of cash ($25). 

In summary, this is the first study that demonstrates that willingness-to-pay is increased when customers are instructed to use a credit card rather than cash. 

The authors also indicate that this effect is likely not due to liquidity constraints - the lack of cash (liquid money) most people have. 


Prelec did research on why credit-card spending hurts less with George Loewenstein in another well-known paper, "The Red and the Black: Mental Accounting of Savings and Debt". The term coupling refers to the degree to which consumption calls to mind thoughts of payment. When people make a cash payment, say handing over $10 for a sandwhich, they experience the pain of paying right then: coupling the pain of spending with the purchase of lunch in their mind. When people pay with credit cards, the payment pain doesn't become realized at the same time as the benefit of consumption, meaning there is a weaker coupling for those transactions. Their model also uses the concept of prospective accounting, the assumption that consumption which has already been paid for can be enjoyed as if it is free.

Peak-End Rule

These findings can be applied to individual businesses' pricing models in order to help consumers get a higher perceived utility. For example, charging guests for their hotel stay in advance, so that they enjoy the trip without thought towards payment at the end. Endings really matter, too. People tend to overweight the ending of experiences and remember something as "bad" or "good" based on the difference between the "peak" and "end" of the experience. In studies, people with a very painful colonoscopy that had mild pain at the end remembered it as being better than people with less pain throughout (Kahneman, Fredrickson, Schreiber, & Redelmeier, 1993). This is called the "peak-end rule", and has been found to apply to material goods as well. Hence, services that smooth or weaken the coupling of payment to experience will result in happier customers. 

Services that smooth or weaken the coupling of payment to experience will result in happier customers

Now, how do these biases come into play for Venmo users?

Word cloud of what people spend money on in Venmo, by Fast Company

Word cloud of what people spend money on in Venmo, by Fast Company

Factor 1: The Real Money Effect

When you use Venmo as payment, you are 2 steps removed from cash. In order to get your Venmo balance to your bank account, you must cash out of your Venmo account, which takes 3 days. Most people maintain a balance in their Venmo account, using it as a second banking ecosystem - often for small, social payments or utilities & rent. Based on research on credit card usage, it is reasonable to say that spending money on Venmo has a lower psychological cost than spending with a credit card or cash. I suspect that with Venmo this becomes even moreso the case, as a great deal of Venmo payments are done in a social context. One must write a subject line for the payment, which becomes a caption contest. Users focus on creating a funny subject line for the payment and including the best emoji, which lessens their focus on the actual money they are spending, thereby increasing transaction utility. If you're laughing to yourself as you send someone money, you are much less sad about sending the person that money. 

Due to many users having a Venmo balance, oftentimes payments don't require a conversion to "real" money (i.e., payment coming out of your bank account). Users describe Venmo money as "not feeling like real money". Most college students would never misplace $40, but a great deal of them have it sitting in their Venmo account. It's plausible they become less likely to cash the money out because they know it will make future small transactions possible and less painful. In Venmo, $40 is a comfortable balance. In Bank of America, $40 means Ramen. 

Factor 2: The Social Spending Effect

Venmo provides an easy solution for a dreaded situation: the group dinner. Instead of painstakingly splitting the bills and writing down different credit card numbers, one or two people can put the bill on their cards and have the others send them specific amounts over Venmo. This has become commonplace amount young people sharing meals and drinks, as it reduces the amount of hassle and pain of spending for most involved. Why?

Well, to borrow from behavioral economist Dan Ariely, the most optimal way to pay at a group dinner (of people who are prone to regularly dine together) is to have one person pick up the tab. Otherwise, everyone feels the pain of paying (especially if the bill was split and you didn't drink), and becomes an accountant trying to figure out exact amounts. This experience, notably a very unpleasant one, will be subject to the peak-end rule. People may remember dinner as being much less fun due to the very unpleasant accounting scramble at the end. I know I, for one, groan at the thought of large group dinners due to past experiences with this issue. 

In the pick-up-the-tab scenario, the person who pays feels the pain of the bill (and also the gratitude of their friends), while the others all feel happiness from a free meal. By the time everyone in the group has taken a turn picking up the tab, the group members will all have a higher average utility than if they split the bill each time. There is a diminishing pain to spending money as the amount increases, meaning Person X will be "hurt" less by paying $100 in one instance rather than $20 at 5 different dinners. 

Venmo allows diners to get some of the benefits of pick-up-the-tab while on the budgets of college students. They reduce the hassle and unpleasantness of splitting the bill by easing the end of dinner accounting war. Then, friends are repaid using the social spending app, and they all get to laugh about their funny transaction names. 

This effect of Venmo depends entirely on usage. I move within groups of friends who use Venmo as a preferred method of payment, but in other groups one person or more doesn't have Venmo. (This is almost as annoying as when someone doesn't have Uber. Don't be that person. Especially if your reason for not having it is "not wanting to give your credit card out".) This goes to say, the welfare-increasing effects of social mobile payments really depend on how your friends do things. 

Other Increases in Utility: Small Payments, No Flaky Friends

Venmo social norms allow you to ask someone to send you $5 for a few beers. It would be weird to ask someone for $2 for a beer at a party, but small amounts are of no consequence over Venmo. Cash makes situations feel more like a market relationship. Using Venmo allows capitalism-averse youth to ask for money while residing in the comfortable confines of social (not market) relationships. Now you have $2 dollars for your beer, and the other person probably thought nothing of the quick payment. 

(This is all kind of amusing, as it reveals how vulnerable to whimsical mental classifications our views of the world are.)

In addition to getting more money for small payments, users can request money from others. When your friend who always forgets to pay you back doesn't fulfill your request, you can send them a reminder until they have no more excuses of forgetting. The request feature turns payments into a proactive, business-like (invoice!) structure, but users still think of it as a social experience. That's a remarkable success for any money-related service.

Lessons from Venmo for Businesses:

1) To reduce the pain of spending, make it more social. 

2) Try to keep costs for users as far removed from money as possible. 

3) Take advantage of the peak-end rule, have people pay up-front for things so they can enjoy them as though they are free. 

4) Always accept credit cards! Ideally with an interface that reminds one less of payments, like Square or Stripe. 

Many companies have aimed to replicate Venmo's success and generally integrate payments into experiences in a more seamless & social way. I suspect that Square and Stripe result in similar reductions in transaction cost, to a lesser extent. The integration of credit card payments into a foreign interface (foreign until recently) removes the familiarity with "cash registers" associated with spending, makes checkout an easier process, and the iPhone extension makes you feel more like you're playing a game than checking out at a store. I don't know about you all, but I'm always kind of amazed and excited, on a very subconscious level, when I pay for something using my card on an iPhone. It feels equally as mythical money as Venmo payments. 



Lessons from Venmo for Consumers:

1) Don't take your credit card with you if you want to spend less! 

2) If you are on a budget, try to use only cash. 

3) When possible, pay for something upfront and/or in a yearly fee rather than monthly, it will make your enjoyment of the purchase higher. 

4) Be conscious towards the peak-end rule in your life. Are you remembering things as better than they were? 

5) Pick up the bill at dinner for good friends! Everyone is better off. 

6) Make your friends get Venmo so that everyone is happier about spending money together! (Or don't, if you are trying to spend less.)

7) Try to take notice of situations: is it a social or market relationship? Which would you expect it to be? Generally, if you expect something to be a market relationship and it is a social one, or vica versa, something interesting is going on.