What Is PayPal and How Does it Work?

What Is PayPal?

PayPal is a payment platform with a website and a phone app that enables payments between parties through online money transfers. PayPal customers create an account and connect it to a checking account, a credit card, or both.

Once identification and payment method are confirmed, users can send or receive payments online or in a store using PayPal as the go-between. Millions of small and large retailers, online and in the real world, accept PayPal payments.

PayPal also offers credit and debit cards branded with the PayPal name.

How Does PayPal Work?

PayPal offers payment services for consumers and for merchants who accept Paypal. Merchants use a PayPal card reader in brick-and-mortar stores or enable Paypal as a payment option on their websites.

Consumers can pay invoices and transfer money with relative ease. Cash can be transferred to any email address or phone number, whether or not the recipient has a PayPal account. If they don't have an account they will then be prompted to make one after you send the money.

Users need an email address to sign up for an account and must provide a credit card, debit card, or bank account to complete the setup. Your mobile number will also be verified. PayPal verifies the information to make sure the person setting up the account is the rightful owner before the service can be used.

Shoppers can choose the PayPal option to complete purchases online if the retailer has the service. Transactions are completed within minutes. Funds may be available immediately for business owners after a sale. In some cases, some or all of the funds may be held for up to 21 days. This is most common for newer sellers without a history.

PayPal for Business

PayPal offers businesses a range of solutions for their day-to-day operations. This includes payment portals for online and in-person transactions, business management services, and credit and financing options. Business owners must also provide an email address in order to create an account.

PayPal attempts to make online purchases safer by providing a form of payment that does not require the payor or payee to disclose credit card or bank account numbers to the website or store. Therefore, the money is secure, privacy is protected.

PayPal Fees

PayPal makes much of its revenue from fees it charges merchants, rather than from the consumers who pay with it.

There is no fee for using PayPal to pay for a transaction if the payment is in your home currency. There is no fee if you send cash to a friend or relative rather than a business, again in your home currency. There's no fee for transferring money to and from PayPal and your bank account, unless you choose an instant transfer.

Other transactions incur fees:

• When making a purchase or sending money, there's a currency conversion fee of 4% charged to the buyer or sender.
• For sellers, a fee of 2.29% to 3.49% plus a fixed fee is charged on each transaction depending on the payment method the buyer uses. Credit and debt cards transactions cost 2.99% plus a fixed fee.

The PayPal-branded credit and debit cards are of course free to use, but can incur fees for certain things like any other card. Interest can apply with the credit card as well.

Other fees apply to less routine transactions such as buying and selling cryptocurrencies and receiving charitable donations.

PayPal vs. Its Competitors

PayPal now holds a 39.06% market share, making it number one in the only payments sapce. Stripe is number two at 36.82% market share. The next closest competitors Authorize.net and Square Point of Sale are far behind with 5.27% and 4.06% market share respectively as of March 2024.

That doesn't necessarily mean they're better, but it means that you'll encounter merchants using PayPal and Stripe more often.

About Stripe

Stripe is a payments platform with two headquarters located in San Francisco and Dublin, Ireland.

Stripe Connect is a newer Stripe offshoot. This version is designed to serve the needs of small online businesses, especially those who want to go global. It allows these businesses to accept dozens of credit cards in 135 currencies, using Stripe as a go-between.

A side-by-side comparison of Stripe and PayPal by Forbes concludes that their services and fees are comparable though PayPal may be better and easier for small merchants while Stripe can be more easily customized by merchants.

Special Considerations

Although PayPal is not a bank, it is subject to many of the same consumer protection regulations by which banks are governed.

For example, the extent of your liability for an unauthorized transaction is determined by how promptly you notify the bank that unauthorized activity has occurred in your account. Notifying PayPal quickly when you have concerns will help to limit your liability, and it is recommended that PayPal users check their accounts regularly.

History of PayPal

An early version of PayPal as we know was launched in the late 1990s as a payments system for Palm Pilot users by a software company called Confinity. The company later merged with X.com—an online banking company—and officially took the PayPal name in 2000.

PayPal broke into the mainstream as the preferred payment mechanism for eBay buyers and sellers. The auction site decided to acquire PayPal in 2002 and made it the site's official payment service while working to expand its reach.

In 2015, PayPal was spun off as an independent company. Company shares trade on the Nasdaq under the ticker symbol PYPL.

Throughout its history, PayPal has acquired other companies that serve different parts of the financial transaction, digital money transfer, and payments markets. Some of these acquisitions brought technology enhancements and additional features that were incorporated into the PayPal platform as the companies were absorbed.

PayPal purchased BrainTree, owner of the rival service Venmo, in 2013.

In addition to those two, PayPal's brands now include Xoom, Zettle, Hyperwallet, Honey, Chargehound, Paidy, and Simility.

The Bottom Line

PayPal is a big player in the crowded field of payment apps for use online and off.

Its basic services, like paying for goods using your checking account and transferring money, are free to the user. Other services come with a fee such as transactions that involve a currency conversion and instant transfers. The fees are industry-standard.

Merchants who accept PayPal pay transaction fees for the service. They also get access to a range of related small business services offered by PayPal.

PayPal is the dominant payment service for online transactions. Small business owners should take a look at competitor reviews when considering which of the many available payment apps they should adopt.