This Is How PayPal and Venmo Make Money
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So you have a PayPal account and you’ve been buying goods and transferring money back and forth with friends and family, all without ever paying a cent. Can this be real? How can PayPal afford to let you do that?

Or maybe you’re wondering how PayPal made $3.239 billion in revenue in Q3 2017, about 21 percent more than what it made in Q3 2016. PayPal is raking in the cash and continues to grow even to this day. Where is all of that money coming from?

In this article, we’ll explore how PayPal and Venmo (a separate payment service owned by PayPal) bring in their revenue. You may be surprised.

How PayPal Makes Money

1. Balance Investments

When you have money in your PayPal account, it isn’t just sitting there.

Say you have a balance of $1,000. PayPal could take that balance and invest it in stocks and bonds, earning a return on that investment. By the time you withdraw your money, PayPal’s investment may have gone from $1,000 to $1,020, allowing PayPal to walk away with a “free” $20. Across millions of customers, this adds up.

This practice is explicitly stated in PayPal’s User Agreement:

“PayPal combines your PayPal balance with the PayPal balances of other PayPal customers and invests those funds in liquid investments in accordance with state money transmitter laws. PayPal owns the interest or other earnings on these investments.”

2. Transaction Fees

Whenever money is sent from one PayPal user to another, that counts as a transaction. Almost every transaction comes with a fee, and this fee applies no matter what kind of PayPal account you have An Introductory Guide to PayPal Accounts & Services An Introductory Guide to PayPal Accounts & Services PayPal offers a lot of services that you might not be aware of -- here's a guide to understanding some of the lesser-known options. Read More : 2.9% + $0.30 per transaction.

This fee is waived when sending money to friends or family, but not if you’re sending money using a debit or credit card. However, sending money like this also waives PayPal’s buyer protections, so think twice before using it as a loophole.

There are also fees when using PayPal Here, the mobile app and card reader combo that lets you process offline payments:

  • 2.7% per swiped or check-in transaction
  • 3.5% + $0.15 per keyed or scanned transaction

With PayPal processing 1.9 billion payment transactions in Q3 2017, it’s easy to see how quickly these fees can add up.

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Image Credit: Pixinooo/Depositphotos

3. International Fees

PayPal makes a lot of money on country-to-country transactions.

To receive money from another country, there’s a 1.5% international transaction fee that applies even when that money is in your native currency. This is one of many reasons why global online shopping sites can be so expensive.

To receive money in a different currency, there’s also a 2.5% currency conversion fee on top of the current market exchange rate, and that’s along with the international transaction fee mentioned above.

This fee is enormous and plays a huge role in PayPal’s revenue. In Q3 2017, almost half of all revenue was international.

4. Withdrawal Fees

PayPal doesn’t charge anything to create an account or withdraw money to a bank account, although there is a $1.50 fee if you want to receive it as a check.

Regular PayPal accounts are eligible for the PayPal Cash MasterCard, which can withdraw money over the counter and from ATMs:

  • $3.00 over-the-counter withdrawal fee
  • $2.50 ATM withdrawal fee

Business PayPal accounts are eligible for the PayPal Business Debit MasterCard:

  • $3.00 over-the-counter withdrawal fee
  • $1.50 ATM withdrawal fee

Overall, this is just a small drop in PayPal’s revenue bucket.

5. Credit Interest Fees

PayPal doesn’t just move money around. It lends money to its customer in two ways.

The first way is through PayPal Credit, formerly known as Bill Me Later. PayPal fronts the cash on a purchase and expects the customer to pay it back in full within six months. If they don’t, they get hit with monthly interest charges at 19.99% APR.

The second way is through the PayPal Extras MasterCard, which is a bona fide credit card. Customers can use it like any other normal credit card and get charged with monthly interest rates up to 25.24% APR.

Learn more about how PayPal Credit works What Is PayPal Credit and Where Can You Spend It? What Is PayPal Credit and Where Can You Spend It? PayPal has started to branch out and offer new services. One such service is the recently rebranded "PayPal Credit". What exactly is it, and it is worth using? Read More and things to think about before applying for a PayPal credit card 5 Questions to Ask Before Getting a PayPal Credit Card 5 Questions to Ask Before Getting a PayPal Credit Card The PayPal Extras MasterCard seems like a really good deal, especially if you do a lot of online shopping. But should you apply for one? These 5 questions will give you the answer. Read More .

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Image Credit: doroshin/Depositphotos

6. Working Capital Fees

PayPal also lends money to businesses through PayPal Working Capital.

A business can request a loan amount up to 30 percent of its annual sales, capped at $97,000 the first time. Repayments are made as a percentage of the business’s future sales, and there’s one fixed fee for borrowing this money.

According to the calculator, this fixed fee can be anywhere from 5 to 50 percent of the borrowed amount depending on the business’s repayment percentage. This all adds up fast when businesses are borrowing tens of thousands of dollars at a time.

7. PayPal Payments Pro

Ecommerce businesses who want a professional shopping experience can enroll in PayPal Payments Pro, which offers integrated checkouts, international payment processing, debit and credit card payment processing, and several other benefits.

This costs a flat fee of $30 per month, which isn’t that much and ultimately ends up being a small portion of PayPal’s revenue, but is still something.

How Venmo Makes Money

For a long time, Venmo didn’t make any money.

Venmo’s primary goal since its 2009 launch was to build a massive and loyal base of users by enabling friends and family to instantly send money to one another for free. Venmo ate the cost of ACH bank transfers (less than $1 per transaction) but recouped the cost of credit card payments with a flat 3% fee.

Unlike PayPal, Venmo doesn’t invest its users’ balances.

This Is How PayPal and Venmo Make Money venmo logo

In 2016, Venmo began rolling out its money-making plan, which involves users paying merchants directly for goods and services through “Pay With Venmo.” Merchants who accept Venmo pay the same fee they’d pay for accepting PayPal payments: 2.9% + $0.30 per transaction.

Venmo isn’t profitable yet, but 2018 is looking to be a strong year. The chief value of Venmo has long been its success at expanding PayPal’s reach as a payment processor to a younger demographic that doesn’t use PayPal. As more millenials adopt Venmo as a way to pay for things, the transaction fees will surely pile up.

PayPal and Venmo: Are They the Best?

It’s clear that PayPal and Venmo are both dominant forces, taking the world by storm and leaving little room for competitors to stick their feet in. But just because they’re popular doesn’t mean they’re right for everyone.

We encourage you to explore these online payment alternatives to PayPal 6 Online Payment Alternatives If You Hate PayPal 6 Online Payment Alternatives If You Hate PayPal PayPal is the biggest online payment provider out there, but it's not the only one. If you're looking for an alternative to PayPal, these 6 options are great. Read More and money transfer app alternatives to Venmo 6 Apps to Help You Transfer Money Between Friends 6 Apps to Help You Transfer Money Between Friends Sometimes you need to send money to friends quickly and securely. Here are six of the best options available. Read More . And no matter which platform you end up on, always be on the lookout for money-stealing internet scams Do You Know 2017's New Internet Scams? Do You Know 2017's New Internet Scams? Millions are tricked by cybercriminals every year, and the scams of 2017 will live on into 2018 and beyond. Here are just a few of the latest internet scams you need to protect yourself against. Read More .

How do you feel about PayPal and Venmo? Share with us in the comments!

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