Finance
What Is PayPal & How Does it Work?

What is PayPal?
PayPal is a payment platform that lets you send and receive money online or in stores. You can use it on the website or through the app on your phone. To get started, you create an account and link it to your checking account, credit card, or both.
Once your account is set up and your payment method is verified, you can start sending and receiving money. PayPal acts as the middleman, making transactions secure. Many online and offline stores, both big and small, accept PayPal payments.
PayPal also offers credit and debit cards with the PayPal name on them, giving you more ways to use your account.
Key Takeaways
Here are the key points about PayPal:
- PayPal is an online payment platform that helps people and businesses send and receive payments.
- It used to be part of eBay but became its own company in 2015.
- Aside from online payments, PayPal also provides a debit card for purchases, credit card readers for businesses, and lines of credit.
- PayPal is known for being a secure way to send money online.
How Does the PayPal Work?
Here’s how PayPal works:
- PayPal provides payment services for both consumers and merchants. Merchants can use a PayPal card reader in physical stores or add PayPal as a payment option on their websites.
- Consumers can easily pay invoices and transfer money. Cash can be sent to any email address or phone number, even if the recipient doesn’t have a PayPal account. If they don’t have an account, they’ll be prompted to create one after receiving the money.
- To sign up, users need an email address and must link a credit card, debit card, or bank account. Their mobile number will also be verified. This verification ensures that the account is being set up by the rightful owner before it can be used.
- Shoppers can choose PayPal as a payment option when shopping online if the retailer accepts it. Transactions are usually completed within minutes. However, for new sellers or certain transactions, funds may be held for up to 21 days.
- PayPal offers a range of solutions for businesses, including payment portals for online and in-person transactions, business management services, and credit and financing options. Business owners need an email address to create a PayPal business account.
- PayPal aims to make online purchases safer by providing a secure payment method that doesn’t require users to disclose their credit card or bank account numbers to the website or store.
- PayPal generates revenue primarily from fees charged to merchants, rather than consumers. There are no fees for using PayPal to pay for a transaction in your home currency, or for sending cash to a friend or relative in your home currency. However, fees apply to other transactions, such as currency conversions and certain seller transactions.
- PayPal-branded credit and debit cards are free to use but may incur fees for certain transactions, similar to other cards. Interest may also apply to credit card transactions. Other fees apply to less common transactions, like buying and selling cryptocurrencies or receiving charitable donations.
PayPal versus its competitors
PayPal is currently the market leader in online payments, holding a 39.06% market share, followed closely by Stripe at 36.82%. Competitors like Authorize.net and Square Point of Sale trail behind with 5.27% and 4.06% market share respectively as of March 2024.
While market share is important, it doesn’t necessarily indicate superiority. However, it does mean that PayPal and Stripe are more widely used by merchants.
About Stripe
Stripe, headquartered in San Francisco and Dublin, Ireland, is a global payments platform. Stripe Connect, a newer offering, caters to small online businesses looking to expand globally. It enables businesses to accept payments in 135 currencies from various credit cards, with Stripe acting as the intermediary.
A comparison by Forbes suggests that while PayPal and Stripe offer similar services and fees, PayPal may be more user-friendly for small merchants, while Stripe offers greater customization options.
Special Considerations
While PayPal is not a bank, it is still subject to many consumer protection regulations similar to those governing banks. For instance, the level of your liability for an unauthorized transaction depends on how quickly you report the unauthorized activity to PayPal. Promptly notifying PayPal when you have concerns can help minimize your liability. It’s advisable for PayPal users to regularly check their accounts for any unusual activity.
PayPal History
PayPal traces its origins back to the late 1990s when it was launched as a payment system for Palm Pilot users by a software company called Confinity. After merging with X.com, an online banking company, in 2000, the company adopted the name PayPal.
The platform gained popularity as the preferred payment method for eBay transactions, leading eBay to acquire PayPal in 2002 and integrate it as the site’s official payment service. This move helped PayPal expand its user base significantly.
In 2015, PayPal became an independent company through a spin-off and began trading on the Nasdaq under the ticker symbol PYPL.
Over the years, PayPal has grown through acquisitions, acquiring companies that specialize in different aspects of financial transactions, digital money transfers, and payments. One notable acquisition was BrainTree, the owner of Venmo, a rival service, in 2013.
Today, PayPal’s portfolio includes brands such as Xoom, Zettle, Hyperwallet, Honey, Chargehound, Paidy, and Simility, each contributing to its diverse range of financial services and features.
Important: PayPal charges no fees for routine payments, but adds a fee for “instant” transfers.
FAQs
Here are some FAQs about PayPal:
Is PayPal a Good Choice for a Small Business?
PayPal is a major player in the small business payment space, offering easy-to-use services and a range of features to help run a small business. However, its merchant fees can be relatively high compared to some credit card payment services.
Is PayPal a Good Choice for a Consumer?
For online shopping in the U.S., PayPal is often a convenient option at checkout, especially if your card or bank account is already linked to your PayPal account. It can also provide an added layer of security since you don’t have to share your payment information with the seller. PayPal also offers buyer protection in case you don’t receive what you ordered. In the real world, there are many payment apps to choose from, so it’s best to compare and choose the one that suits you best.
Is PayPal Safe to Use?
PayPal uses end-to-end encryption and offers two-factor authentication for added security. It’s considered a safe option for electronic transactions.
The Bottom Line
PayPal is a significant player among the various payment apps available both online and offline.
Basic services like using your checking account for payments and transferring money are free for users. However, fees apply to other services such as currency conversion and instant transfers, which are standard in the industry.
Merchants who use PayPal to accept payments pay transaction fees. In return, they gain access to a range of small business services provided by PayPal.
As the dominant online payment service, PayPal is a popular choice for online transactions. Small business owners should review competitor offerings to determine the best payment app for their needs.