Venmo was hit by a wave of payments fraud earlier this year that helped push losses higher than the company previously expected and prompted it to shut down some user features to control the damage.

In the first three months of 2018, the digital money-transfer service owned by PayPal Holdings Inc. recorded an operating loss of about $40 million—nearly 40% larger than the loss for which the company had budgeted, according to internal documents reviewed by The Wall Street Journal.