The How PayPal works.


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 it work?

The History of PayPal

Many people 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 payments.

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 information.

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 on it.

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 away happy.

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.


 How PayPal works.