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 proof of funds 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.

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. 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 and the company promises that transfers are available for payment or withdrawal to a bank account immediately.

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. Therefore, the money is secure, privacy is protected, and, since the customer base is so large, transactions are faster than traditional methods.

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 you use a PayPal balance or your linked bank account and 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.

Other transactions incur fees:

• There's a 4% currency conversion fee for most transactions that involve conversion.
• A PayPal transaction that uses your linked credit card incurs a fee of 2,9% plus a fixed fee that varies by country. It is 0.30 cents in the U.S. The trick here is to make sure your PayPal account defaults to your checking account, not to your credit card.

The PayPal-branded credit and debit cards have their own fee structures, which seem fairly typical for the industry.

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

PayPal vs. Its Competitors

PayPal now holds a 32.3% share of the global market for online payment services. That still leaves it trailing the combined numbers of Stripe and Stripe Connect, which jointly have a market share surpassing 40%. The Dutch-owned Adyen comes in third at 11.6%. All other competitors are in single digits, including Square, Braintree, and Venmo.

That doesn't necessarily mean they're better, but it may mean that the PayPal and Stripe payment options are easier to find in stores and online.

About Stripe

Stripe is a payments platform based in 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.

PayPal's brands now include Xoom, Zettle, Hyperwallet, Honey, Happy Returns by PayPal, 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 fees, like PayPal credit and debit cards and transactions that involve a currency conversion. 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.