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PayPal vs. Venmo: An Overview

PayPal Holdings Inc. (PYPL) and Venmo (now a subsidiary of PayPal) are two huge names in the digital wallet game. PayPal is the long-standing, trusted payment service that came to prominence as a payment method for eBay. Venmo, the new digital wallet, has become so popular among millennials that many use the term "to Venmo" colloquially as a verb.

Key Takeaways

  • PayPal and Venmo are two very popular online person-to-person payments platforms.
  • In 2012, Venmo was bought by Braintree, and then in 2013 Braintree was acquired by PayPal - so Venmo is now a PayPal company.
  • Venmo, which is restricted to personal use, is often free and exists partly as a digital wallet, and partly a social media feed. Certain daily and monthly transaction size limits apply.
  • PayPal is encouraged to be used by businesses, and may charge a fee for transactions and transfers, but typically does not have as strict limits on transactions size as Venmo does.

PayPal

The first widely-known and -used digital wallet was PayPal. PayPal was founded in 1998, went public in 2002, and was quickly purchased by eBay.  The site grew; by the time PayPal was spun-off in 2015, it had become a huge moneymaker for the auction site. 

In 2009, Andrew Kortina and Iqram Magdon-Ismail found themselves needing a way to quickly and easily transfer money to one another. Aiming to provide the convenience of cash without the hassle of carrying money around, Venmo was born. In 2012, Braintree bought Venmo, and in 2013, PayPal acquired Braintree.

While both of the apps are used to facilitate transactions and to easily and securely transfer money between bank accounts, PayPal has diversified into other financial products and is beginning to resemble a bank more than a payment app.

Today, PayPal not only offers payment services but also finances large purchases, extends lines of credit, and provides customers with debit MasterCard Inc., which use PayPal balances to pay for things in a brick-and-mortar store or to withdraw cash. With PayPal being so widely known, there are stores throughout the world that will accept PayPal payments for goods or services; some even accept contactless PayPal payments.

PayPal’s website advertises a 2.9% + $0.30 transaction fee, which works out to $3.20 for a $100 transaction. This sounds simple until you dig deeper and find all the different packages and services available to merchants. PayPal's fee structure for merchant transactions is different from its personal account transfers. PayPal charges between 2.5 and 3.2% plus a flat rate of 30 cents on a transfer of $100 in standard fees for merchants selling goods and services online, including eBay sellers and private businesses that use PayPal as a payment option. When the amounts increase, the percentage fee charged does not deviate substantially, going up from 2.5 to 3.2%. For micropayments, which may be transferred when an online small business owner sells items for prices less than $10, the fee charged to merchants to accept funds from customers is closer to 5%.

PayPal charges 2.9 percent + $0.30 for payments from debit and credit cards but offers free transfers from PayPal balances. Venmo is free to use.

Venmo

Venmo is partly a digital wallet, partly a social media feed. The app asks for comments on every transaction, and these comments are posted, newsfeed-style, for friends to browse. People use this comment box to post amusing stories and inside jokes. Venmo adds an element of fun to paying a friend back for dinner last night. There are also privacy settings that allow users to control which transactions, if any, are visible.

Part of Venmo's appeal is that it replaces the impersonal, private transacting that happens on PayPal with a network of friends. In fact, Venmo's website even explicitly states that the service is “designed for payments between friends and people who trust each other.” With a system designed to emulate cash payments, transfers between Venmo accounts are instantaneous and cannot be undone: paying the wrong person means asking nicely that they return your money and hoping they do. The company can also intercede, but the recipient must consent to the refund.

Venmo, on the other hand, is really good at what it does. It replaces cash when you owe a friend money. You can't pay Netflix Inc. with Venmo, but you can pay your roommate your half of the Netflix bill. Venmo has also branched out into traditional banking services, albeit in a more limited capacity than PayPal.

Venmo is free to use, however businesses are not allowed to use the service - it is often limited to personal use only. Some merchant services, such as for Uber or Lyft drivers may be paid with Venmo. Credit card payments linked to Venmo are subject to the 3% percent transaction fee that the card company charges, but debit card payments and transfers from a user's balance cost nothing.

Another source of revenue is derived from the Venmo debit card, which draws directly from a user’s Venmo balance. This card operates through Mastercard and can be used at any business that accepts Mastercard. This function has helped Venmo expand beyond its exclusive P2P platform, empowering customers to transact directly with online retailers and brick-and-mortar establishments.

In both revenue-generating scenarios, Venmo charges merchants a 2.9% fee, plus $0.30 per transaction. Companies are willing to pay these higher-than-average rates, due to the wealth of new customers Venmo brings to their doors. Furthermore, Venmo users are more likely to elevate the profiles of participating companies, over their social media accounts.

The Bottom Line

Comparisons of Venmo and PayPal often conclude that Venmo is the superior service because of its ease of use. While that may be true, depending on the features demanded or the payment amount, PayPal could still be of more use than Venmo.