HOW PAYPAL WORKS
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How does PayPal work?
Not even five years ago, if you told someone to make a
payment or pay for a purchase using PayPal, they may have asked you to repeat
what you had just said. But say the word “PayPal” today, and most people are
sure to know what you’re talking about. PayPal has become one of the main ways
to make purchases, send and receive money, and even send invoices online. When
it’s put quite simply, PayPal can be considered to be an online bank. And it’s a
bank which you never enter and rarely speak to customer service reps, even
though you may wander into PayPal every day. And in a day and age when the
Internet is becoming the main tool for people to handle daily tasks, more and
more people are continuing to do just that. But just what is PayPal and how does
The History of PayPal
think that because eBay owns PayPal, that it was eBay that created it but that’s
not exactly true. It was actually two men named Peter Thiel and Max Levchin that
created the money service in 1999. At that time it was known as Confinity. Their
original vision was to build a way for people all over the world to send and
receive currency without any of the government controls that banks have. This in
theory would give people more control over their own money. When the service
first opened up, new customers were given $10 just for signing up and there were
plenty of referral incentives for those who could get their friends to join.
However, this popularity proved to be to PayPal’s own detriment, because the
government soon also caught wind of the popularity and placed those controls
over them that went against PayPal’s original ideal.
But PayPal’s popularity soon became explosive, and
offering these types of incentives was no longer practical by the company.
PayPal became so popular in fact, that it was the default payment method of
countless websites. The auction site eBay also offered PayPal as a payment
method as well as their own money service, Billpoint. Buyers on eBay though
started using PayPal much more than Billpoint, and it was obvious that PayPal
was the preferred payment method. It was only at that time that eBay bought
PayPal, but they certainly never created the money service. Although, it is
largely due to eBay that PayPal is as popular as it is today.
What is PayPal?
PayPal is a website that is enabled with encryption
software. This software allows anyone to hop online and send money, send an
invoice, or get money. Just about any financial transaction can be done through
PayPal including sending and receiving money, making donations, and purchasing
goods online through auction and retail sites.
The most standard PayPal account is free to sign up
for and it’s an email address-based website. This means that as long as you have
an email address, you can have a PayPal account. You can also send money to
anyone else who has an email address, even if they don’t have a PayPal account.
Simply send them money through PayPal, and they will receive an email alerting
them to the fact that they have money waiting for them. The money will wait for
them in PayPal until they sign up for an account and withdraw their money.
Getting an Account
Signing up for a PayPal account is very easy and
only takes a few minutes. And, you don’t even need a bank account to use
PayPal’s services, although to take full advantage of all that PayPal has to
offer, a bank account is a good idea. During the registration process, you will
be asked to enter some personal information, such as your full name and address.
If you’ll want PayPal to transfer money directly into your account when you
receive a PayPal payment, you will need to enter your banking information.
PayPal will verify this information by depositing a small amount of money into
your bank account. Usually this amount is less than a dollar and they will
actually make two different deposits. Once those deposits have been made, you
will need to verify how much money was deposited into your bank account. This
verifies to PayPal that you are the bank account holder and that you are
authorized to make transactions on that account. Having a bank account linked to
your PayPal account can also be helpful when you want to add money to your
PayPal account from your bank account so you can make online purchases and
You can also use your credit card to use PayPal
services. You can have funds withdrawn from your credit card rather than from
your bank account. If you choose this option, you will also need your credit
card information and will also be asked to verify this information for PayPal in
the same type of manner that you would be asked when giving bank account
When you sign up for a PayPal device, you’ll also
be given the choice as to what type of account you would like to set up. PayPal
offers three different kinds of accounts: personal account, business account, or
premiere account. Just like a bank, the type of account you choose will give you
access to different services and features that PayPal offers. And the different
levels all come with different fees associated with them as well.
If you’re going to be using your PayPal account for
the occasional transaction on an auction website, or to send or receive the
occasional payment, then you only most likely need a personal account. A
personal account doesn’t have any fees attached to it, which is great for people
who don’t want to add PayPal fees on top of their occasional purchases. And
you’ll still be subjected to fees for certain services, such as currency
exchange. However, a personal PayPal account also comes with only the very basic
of PayPal services. This means that while you’ll still be able to send and
receive money, you’ll be able to do little more than that. And even the
transactions you make will have their own limit placed upon them.
With a personal PayPal account, you’ll only be able
to withdraw $500 a month. This means that if you’re using PayPal very regularly
and making large transactions through the website, you probably don’t want to
sign up for a personal account. Even the customer service that you’ll receive
with a personal PayPal account is not comparable to that of their upgraded
accounts. Personal customers don’t have a toll-free number they can phone, and
when they do make the long distance call for customer service, they will most
likely need to wait for a longer time.
Premiere PayPal accounts and business accounts are
very similar. The only real difference is that only actual businesses, with
actual business names, can sign up for business accounts. It’s also only with
business accounts that different people can have authorized access to it.
Individuals can enjoy all the same benefits of a business, without actually
being one, by signing up for a premiere PayPal account.
Some of these benefits include things such as having unlimited credit card
transactions; being able to set payment receiving preferences; sending mass
payments; signing up for subscriptions; and using an ATM or a debit card with
PayPal. Of course, the phone number that premiere and business customers will
use is toll-free and also has extended hours. However, all of these perks do
come with a cost.
Every payment received in a business or premiere
PayPal account is charged a percentage of that payment. This percentage is
usually 2.9 percent of the payment but there are some exceptions. Any account
that has received $3,000 in one month is given a break with fees of only 2.5
percent. Any time that an account has $10,000 deposited into it in one month is
only charged 2.2 percent in fees and anything over $100,000 is only charged 1.9
percent in fees. However, PayPal does make their money back. For any money that
is deposited into any business or premiere account, there is a $0.30 PayPal fee
Behind the Scenes of PayPal
Although PayPal may work and seem very much like a
bank, they are not and while you can go to PayPal’s headquarters, you shouldn’t
expect to be walking into a financial institution. PayPal works as a middleman
between consumers and banks and credit card companies. When someone has an
account with PayPal and deposits money into their PayPal account, it really just
goes into one of the many bank accounts that PayPal uses. They keep track of how
much money you deposited via your PayPal account number. When you withdraw money
from your PayPal account, it will be withdrawn most likely from the same PayPal
bank account it was deposited into. PayPal will also keep track of this via your
account number and deduct it from the total balance remaining in your PayPal.
While this probably sounds very much like a bank,
there is one major difference that critics have been quick to pick up on. While
you may add money to your PayPal account and have it there for some time, you
will never gain any interest by allowing PayPal to hang onto your money for you.
However, PayPal will be earning interest on that very same money, because it’s
sitting in an actual bank account that’s under their business name. While this
may irk some, it’s certainly not enough to deter any of the millions of PayPal
customers from using the service.
But PayPal also has to pay some fees on their end
as well. In a transaction where only a credit card is used instead of PayPal,
there are fees collected known as interchange fees. These fees are fees the
merchant must pay whenever someone uses a card. These fees are then distributed
among many different groups and companies including the bank that is used to
make the credit card transaction, and the credit card company that issued the
card. While the merchant pays these fees if you were to just use a credit card,
if you use PayPal, it is PayPal that will pay the interchange fees. This is one
reason they give for not paying out interest, and another reason why they also
need to charge fees on every transaction.
PayPal also claims that using their service over
using just a credit card when shopping online is more secure. One reason for
this is because when you use your credit card through PayPal, all of your
personal financial information stays with them rather than being handed to the
merchant and then to the credit card company, which leaves this information open
to risk of falling into the wrong hands.
Common PayPal Problems
Although PayPal does offer users an easy and
convenient way to make payments and buy goods online, there have been some very
serious criticisms thrown at the business, and not every customer has walked
The biggest problem with PayPal lies in the fact
that it’s very much like a bank. This means that they have access to people’s
personal funds, their bank accounts, and their credit cards. They can also
withdraw and deposit from these accounts at any time. However, PayPal has been
deemed not to be a bank by the Federal Deposit Insurance Corporation and
therefore is not regulated as one. Because PayPal does not accept deposits of
money like a bank, have a bank charter, or have any physical money, they are not
considered to be a bank. This also means however, that they are not expected to
resolve customer disputes or offer customer service in the same manner that
banks are required to.
Another large complaint of PayPal is that your
account can sometimes be frozen without any warning. If your account does become
frozen, it cannot be used for sending or receiving money. To have the account
unfrozen and reactivated, you will need to verify your identity with PayPal.
This is a very long process and sometimes, the money is never returned at all.
Others are concerned about PayPal’s terms of
service agreement. This agreement is something that everyone must agree to
before signing up for a PayPal account. The agreement is pages upon pages of
legal jargon which is very confusing and likely, won’t be read by every single
person interested in getting a PayPal account. However, within these terms,
PayPal takes away the right of users to ever sue them, and also voids much of
the protection that is provided to them through their credit card policies.
PayPal isn’t revolutionizing the world of banking.
It’s still making transactions and allowing people to send and receive money the
way banks have been for generations. But what PayPal has done is revolutionized
the world of Internet banking, and the way that people send and receive money
online. PayPal is a secure and safe banking environment that allows people
access to their funds quickly and easily, even though it may sometimes have a
few hiccups along the way.