Venmo Chargebacks - 2020 Merchant Guide
Credit cards make it incredibly easy to make payments at online and in-person retailers, but when it comes to informal transactions between friends and family, they’re a non-starter. With fewer people making a habit of carrying cash around, peer-to-peer payment apps like Venmo have stepped in to make it easy to make small electronic payments to individuals.
As Vemno’s popularity grows, some merchants are starting to accept it as a form of payment, but even Venmo transactions can turn into chargebacks. Before leaping into the brave new world of P2P payments, what do merchants need to know about Venmo chargebacks?
Since its debut in 2009 as an app designed to facilitate bill-splitting and IOU payments between acquaintances, Venmo’s userbase has grown to exceed 40 million people, making it one of the most popular and widely-used P2P payment platforms. Venmo is especially popular among younger demographics, so many merchants who target those age groups see a clear benefit to including Venmo as one of the payment options they accept.
Merchants can always reach new customers by offering more diverse and varied payment options, but with every new method comes new forms of fraud and chargebacks. For merchants who have made the decision to accept Venmo payments, it is imperative that they understand how fraud and chargebacks work on this platform, and what they can do to mitigate these potential hazards.
How Does Venmo Work?
Venmo functions as a go-between for users who want to send payments to each other. Users can fund their Venmo accounts with a bank account, debit card, or credit card. They can then make payments to any other user on the platform. ACH and debit transactions are free, but payments funded by credit cards carry a 3% fee. Payment recipients can transfer funds from their Venmo account to their bank account.
Venmo users can also obtain a Venmo-branded Mastercard that works like any other debit card but draws funds from their linked Venmo account instead of a traditional checking account. This card can be used anywhere Mastercard is accepted; the merchant does not need to be set up to accept regular Venmo payments. However, merchants can choose to accept cardless Venmo payments if they have a payment processor that offers Venmo integration, such as PayPal Checkout.
By default, Venmo posts all transactions to a social feed that users can view. While some users may understandably wish to opt out of this for privacy reasons, it can serve as a little bit of free advertising for merchants.
Are Fraudsters Using Venmo?
The answer, sadly, is of course. Wherever money is changing hands, fraudsters will be there attempting to snatch it away. While there are some elaborate forms of Venmo fraud that involve the fraudster soliciting payments to their own account, the most common type that merchants will encounter is a fraudster using stolen payment credentials to open up a Venmo account. The fraudster will then make purchases with the account until the money runs out or they are discovered.
This puts merchants in a difficult positon, because while Venmo is responsible for authenticating the account and verifying the user’s identity, it is ultimately the merchant who will be out the product and the money when they receive a fraudulent Venmo payment that ends up getting disputed.
How Can Venmo Transactions Become Chargebacks?
There’s no magic or special sauce to what Venmo does—like we said, it’s just a go-between. It will deliver funds from your account to your friend’s account, but behind the scenes you’re just making a normal electronic payment to Venmo so they can deliver equivalent funds to the recipient.
Bank account funded Venmo transactions would be subject to the rules and limitations that govern ACH transactions, but transactions funded by credit cards can be disputed just like any other credit card transaction: the user calls their bank, says “I never authorized this payment to Venmo,” and the chargeback train starts rolling.
Venmo suspends accounts that have chargebacks associated with them. Users must log in and make an ACH payment to pay back the chargeback amount in order to get their account reinstated. This helps to reduce Venmo chargebacks that would be categorized as friendly fraud, but true fraudsters won’t care about abandoning an account once it has served its purpose.
How Can Merchants Protect Themselves from Venmo Chargebacks?
The first rule for merchants is simple: never accept payment from a customer via Venmo’s P2P payment system. Venmo’s terms of service state that the platform is not to be used to pay for goods or services in this way, and merchants have all the liability and no protections if they are defrauded by a P2P payment. Instead, merchants must use the Venmo checkout platform offered by its parent companies, Braintree and PayPal.
By using Venmo’s merchant platform you can gain access to the fraud protection tools the processor offers, but many of these tools—CVV verification, for example—will not apply to Venmo app payments. However, methodologies such as risk scoring can potentially be applied to screen out Venmo payments that bear likely signs of fraud. By screening out these transactions, you can minimize your exposure to fraud and chargebacks over Venmo.
Of course, with risk thresholds and similar methods you always run the risk of turning away legitimate customers, which can defeat the purpose of expanding your payment options to include Venmo in the first place. The only way to strike an effective balance is to carefully monitor your transaction and chargeback data, identify the true sources of your chargebacks, and adjust your strategies and thresholds accordingly.
It’s always exciting when a payment platform that taps into an underserved market rises to the fore—for merchants, these new payment schemes represent new markets, new customers, and increased revenues. The thing you have to remember is that there’s always risk involved, and every new payment method brings new challenges to understand and overcome. Merchants should accept Venmo if it makes sense for their business, but knowing what to expect in terms of chargebacks is vital.
When you understand what your liability is in various payment scenarios, how the platform deals with disputes, and what the data reveals about your own unique challenges, you can put plans, tools, and procedures in place to manage disputes and prevent chargebacks from eating up your revenue.