Venmo Chargebacks - 2023 Merchant Guide

Table of Contents

1. How Does Venmo Work?
2. Can Merchants Use Venmo?
3. What Kinds of Fraud Happen on Venmo?
4. Can Venmo Transactions Become Chargebacks?
5. How Can Merchants Protect Themselves from Venmo Chargebacks?
6. Does Venmo Have Buyer Protection?
7. How Do I Refund on Venmo?
8. What Happens If You Chargeback Venmo?

Cash transactions are on the decline, especially among the younger generations. More and more customers are using credit and debit cards, mobile wallets, and other methods of payment. Many people now say they don't even carry cash most of the time. This phenomenon has created a new market: peer-to-peer (P2P) payment apps. These apps facilitate small electronic payments from one user to another, making it easy for those who don't always carry cash to split a check or pay out a friendly wager.

One of the major players in this emerging market is Venmo. And while it was originally intended for transfers between friends and colleagues, some merchants have started accepting Venmo as a method of payment for purchases. What do merchants need to know about how Venmo works and what their exposure to fraud and chargebacks on the platform might be?

Since its debut in 2009 as an app designed to facilitate bill-splitting and IOU payments between acquaintances, Venmo’s user base has grown to exceed 65 million people, making it one of the most popular and widely-used P2P payment platforms. Venmo is especially popular among younger people, 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 of payment 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.

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. Users can either pay a fee to transfer funds immediately or wait 1-3 days for a normal, free transfer to complete.

Venmo users can also obtain a Venmo-branded Mastercard. This card works like any other debit card but draws funds from their linked Venmo account instead of a traditional checking account. The one exception to this is an additional fee Venmo charges for cash withdrawals using the card.

Venmo cards can be used anywhere Mastercard is accepted; the merchant doesn't 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 many users opt out of this for privacy reasons, this feed can serve as a little bit of free advertising for merchants.

Venmo initially began allowing e-commerce merchants to accept Venmo payments through integration with Braintree or PayPal, providing they met the requirements. However, Venmo has now launched a new system that allows merchants to create business profiles on the app in order to accept payments from users more seamlessly.

According to Venmo, over 2 million merchants are currently accepting Venmo payments. Many of these are e-commerce merchants, but Venmo also allows brick-and-mortar merchants to accept payments either by using the QR code system already in the app or through integration with a compatible point-of-sale system.

Wherever money is changing hands, fraudsters will be there attempting to snatch it away. The most common type of fraud 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.

Fraudsters can also get their hands on the account credentials for an existing Venmo account and use that to make fraudulent payments.

Since Venmo is a business that directly handles payment information, they take account security seriously, but most users don't use unique passwords for every account with every app or website they sign up for.

When one of these less secure websites has their database compromised, fraudsters will enter leaked credentials into other websites and apps, hoping the user in question reused the same login information. The user likely won't have any indication that their account has been compromised until they notice fraudulent payments being made.

This puts merchants in a difficult position, 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.

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.

Many traditional fraud prevention tools, such as CVV verification, don't apply to payments made using the Venmo app. However, methods like 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 under-served market rises to the fore—for merchants, these new payment schemes represent new markets, new customers, and increased revenue. 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.

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