In the era of digital payments, PayPal (NASDAQ:PYPL) is the undisputed leader. The company has evolved from being a convenient e-commerce checkout method to a full-featured digital payments impresario.

One of the key components to PayPal's success has been Venmo, the company's person-to-person (P2P) payment app. Venmo has been hugely popular among millennials as a way to send money to friends, split a restaurant bill, or pay a roommate's portion of the utilities. For all of its success, though, payment processor Square (NYSE:SQ) is giving the company a run for its money, as downloads of its Cash App pulled ahead of Venmo last year and have continued to extend their lead.

Let's dig a little deeper to find a couple of takeaways for investors in the payments space.

A person using the Venmo app, with a Chinese takeout food container on the table in the background

Image source: PayPal.

Cashing in

Recent research by Instinet analysts Dan Dolev and Conan Leon revealed that cumulative downloads of Square Cash climbed to 56.1 million, compared to 49.7 million for Venmo. This marks the largest gap between the rival cash apps thus far. 

It's important to note that downloads alone doesn't tell the whole story. During its first-quarter conference call, PayPal divulged that Venmo had 40 million active users, or customers that had used the app at least once during the previous 12 months. Square doesn't regularly provide a comparable metric, but it reported 15 million monthly active users in Dec. 2018, which more than doubled year over year. 

One of the more intriguing revelations from Instinet's research is that users of the Square Cash App tend toward a lower-income demographic, typically making less than $50,000 per year. This illustrates that Square is reaching the under-banked and could be more disruptive to existing services like prepaid credit cards then it is to rival PayPal. The study found that while more than 80% of Cash App customers use prepaid cards, nearly half (45%) admitted to using them less after discovering the Cash App. 

The vast number of un-banked and under-banked consumers represents a considerable opportunity, numbering an estimated 50 million people in the U.S. These customers typically avail themselves of services outside the traditional banking system, like payday loans, prepaid cards, and money orders to make payments. Square appears to be tapping this particular demographic more effectively than PayPal.

Men and women sharing drinks at a coffee bar while smiling, laughing, and looking at their smartphones

Image source: Getty Images.

A growing ecosystem

Both PayPal and Square have growing ecosystems of products and cash apps that represent small, albeit fast-growing parts of their respective businesses.

Venmo has been hugely successful at attracting millennial users, and the most active customers use the app every day, while the average user will "Venmo" someone two or three times each week. PayPal credits a growing network effect with expanding beyond the younger user base that was responsible for much of the app's initial growth. PayPal's partnerships with a laundry list of big banks, digital wallets, and other payment systems gives customers a growing choice of options -- without ever having to leave the app. The company has also expanded internationally and grown its merchant services to include predictive intelligence, data analytics, disbursements, and risk management.

In addition to its instantly recognizable credit card payment dongle, Square offers a growing list of merchant services, including point-of-sale devices, small-business loans, payroll services, and more.

2 ways to win

It's easy to fall into a "winner-take-all" mindset, but while Venmo and Square Cash are competitors, they are just a small part of each company's overall business strategy. Additionally, while some areas of their businesses overlap, there's plenty of room for both to succeed as the world moves further away from cash and other more traditional payment methods.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.