Mr. Kortina (Photo: Twitter)

A source familiar the deal told Betabeat yesterday that Venmo, a New York City-based mobile app that lets you split bills with friends, is in the process of being acquired by Braintree, a Chicago-based online payments company and PayPal competitor. The New York Times broke the news this afternoon, reporting a $26.2 million acquisition price. On the company blog, Venmo said the deal closed in mid-June and that its payment-sharing service "will remain unaffected" and continue to operate as a wholly-owned subsidiary.

Venmo and Braintree share an investor, Palo Alto powerhouse Accel Partners, which also invested in Facebook.

The two startups do seem to be in the midst of a mutual appreciation society. Last week, Braintree's community manager Kristi Lynch tweeted, "I know it sounds weird, but the @Venmo app makes me wish I owed more people money." Two Venmo employees favorited the tweet.

Venmo was founded in Philadelphia in 2009 by two former college roommates, Andrew Kortina and Iqram Magdon-Ismai. The duo eventually moved the company to New York City, where Venmo become one of the early stars in the city's growing tech orbit, embraced by early adopters for making it easier to split the cost of dinner, drinks, monthly cable bills--or any of the innumerable costs of urban life--over their phones. There were even cutesy, customizable receipts, eagerly tweeted out by the Alley in-crowd.

However, Venmo took awhile to introduce itself to the public and didn't emerge from private beta until this March, when it made the service available on iOS, Android and online. By that time, other players like PayPal and Square were aggressively angling for dominance in mobile payments, although not in the bill-splitting niche. Venmo raised a comparatively modest $1.2 million over the last three years, but from a number of notable investors. According to Crunchbase, Betaworks, Lerer Ventures and RRE Ventures all participated in its 2010 seed round, along with Facebook mafiosos Dave Morin and Dustin Moskovitz. Last year, Venmo raised a Series A from existing investors Lerer and RRE, along with Greycroft Partners and Accel Partners.

The Times reports that Venmo's 23-person team will not relocate from New York City to Chicago, but will continue to operate out of the East Coast.

Braintree, which was founded in 2007, got a huge influx of cash last June when Accel Partners, which backs a number of mobile payments startups, plowed $34 million into the company. The Chicago startup powers online payments for businesses, providing a merchant account, payment gateway and credit card storage, all in compliance with Payment Card Industry (PCI) standards. Accel partner Ryan Sweeney, who joined the startup's board, described the payments company as providing a core foundation for Braintree clients, a list that includes high-profile, fast-growth businesses like Airbnb, LivingSocial, OpenTable, Shopify, GitHub, 37Signals and more.

In a TechCrunch post about Accel's investment, Mr. Sweeney predicted that the online payments industry would "consolidate dramatically" as payments became bundled into other services. In the past few months, however, the industry seems to be marked by increased fragmentation, with everyone from Verizon to Walmart to AT&T rushing to offer their own app, grasping for a chance to lead the payments evolution.

Braintree signaled its interest in mobile--Venmo's playground from the start--back in February, when it released tools for mobile app developers that would let merchants accept payments within a smartphone or tablet app. TechCrunch reported that the new tools help developers "avoid PCI compliance issues by encrypting sensitive credit card data when it is entered by the user on their mobile device." When merchants pass encrypted data from their server to Braintree for processing, Braintree uses a private key to decrypt the information, thus keeping credit card data out of merchants' hands.

A number of mobile payments companies, including Venmo, which uses a 256-bit encryption, have run into compliance issues with an obscure, broadly written law called the the California Money Transmission Act. As BusinessInsider reported, even PayPal had trouble with the law before it was acquired by eBay. As of last month, Venmo, Square and Amazon all had applications pending with California's Department of Financial Institutions. (It's worth noting that Robert Oswald, a Braintree ecommerce consultant, is one of the 16 people who follow the question, "How concerned are Venmo investors that it is not registered as a money transmitter in every US state?" on Quora.)

As Venmo co-founder Andrew Kortina told Betabeat in March, unlike other payments startups that try to get vendors to sign up in order to increase distribution, Venmo has taken a different approach, relying on friends to encourage friends (the few you'd normally split a bill with) to sign up. PayPal is great for strangers, he argued, but Venmo is optimized for people you know and trust. Initially the startup, which was merely SMS-based--leveraging a user's phone contacts--covered credit card fees for its users as it slogged through the arduous process of interfacing directly with banks.

When it emerged from private beta, however, Venmo required new customers to make payments from their bank accounts (or their Venmo balance) if they wanted to use the service for free, otherwise users had pay Venmo a 3 percent fee for using a credit card after the first $500. In March, Venmo told us it was processing $10 million in transactions a month and growing 30 percent month-over-month. Mr. Kortina predicted Venmo would do $250 million in transaction volume this year. Not long after  the app was released to the public, Venmo stopped losing money on credit card transactions. As we wrote back then, "By Silicon Alley standards, that’s killing it."

This is a breaking story, we will update the post when we know more. 

Previously:

What’s a Little App Between Friends? Venmo Only Cares About You and the People You Split Lunch With

Hello Venmo! Peer-to-Peer Payments Startup Picks Up Steam

Cutesy Venmo Receipts Are Now a Thing