How Does PayPal Work? A Complete 2024 Guide

PayPal is a digital payment platform that enables payments between parties through online money transfers via their website or phone app. All you need to do is set up a PayPal account and link your credit card or checking account to start using its features. Millions of small and large retailers, online and in the real world, accept PayPal payments. They process an average of 41 million transactions every single day. PayPal services do vary from country to country, so be sure to check what features and currencies are supported where you live or visit.

History of PayPal

PayPal started in 1998 as a company called Confinity, who began working on digital payments for businesses and consumers. Shortly after, the company was renamed PayPal with the idea to create the world's first digital payment platform.

In 2002, PayPal joined eBay to become its official payment provider. Prior to PayPal entering the scene, eBay users would make payments with checks and money orders sent via US mail. By 2011, it had grown to over 100 million active users, supporting 25 currencies and 190 markets, and had started offering deferred payments and financing with the Bill Me Later option, also known as PayPal Credit. Over the next few years, PayPal partnered with Visa, and acquired several companies to expand its offerings and capabilities, such as Venmo, Braintree, Zettle, Hyperwallet, and more. Today, PayPal is headquartered in San Jose, California.

Who Uses PayPal?

Since PayPal boasts over 200 million global users and 29 million merchant accounts, it's safe to say pretty much everyone. Today, it's still the top digital payment option for buyers on eBay. Anyone can sign up for free, making it one of the most popular and user-friendly digital payment platforms worldwide.

How Does PayPal Work?

PayPal is easily set up in a few easy steps. Once a user adds a bank account, credit card, or debit card to their PayPal account, all eligible payments to merchants are processed through PayPal instead of your personal bank. It allows consumers to pay invoices and transfer money easily, and allows merchants to offer PayPal online payment services or card readers in physical stores as payment options. All you need is an email address and a credit card, debit card, or bank account to complete setup. Your mobile number also needs to be verified. This helps PayPal verify the information and ensure the person setting up the account is the rightful owner before services can be used. Once set up, users can send money across the globe, within the US, or over 130 other countries using Xoom service, even if the recipient doesn't have a PayPal or Xoom account. They also ensure payment protection and digital security for these transactions, which give users peace of mind when shopping.

How to Set Up PayPal

Follow the steps below to get up and running with PayPal. It's quick and easy if you have your information handy, and best of all, it's free!

Step 1

Go to PayPal.com or download the app, and click Sign Up. Determine if you need to create a Personal or Business account. Soon, you'll be able to manage money from anywhere, at any time.

Step 2

Enter your personal information. Most likely, you'll need these basics listed below:

• Name
• Email address
• Date of birth
• Address
• Phone number

At this time, you'll also be setting up your password. It's best practice to use at least 8 characters containing a mix of letters, numbers, and special characters if allowed to protect your account from hacking attacks. You'll also need to accept PayPal's User Agreement, which you should always review.

Step 3

Linking a payment source is next. This will be your bank account, credit card, or debit card. Click the "Link a Bank Account" to start the process. In the Wallet icon, you'll also be able to see an overview of your PayPal balance and any linked credit and debit cards.

To add your bank account, you'll need the usual information:

• Bank name
• Bank routing number or code
• Your account number
• Branch code if applicable
• Bank location

No deposit amount is required, since opening your account is free.

Step 4

Verification of account and personal data is the final step. Once your bank information is entered and saved, a verification code may be sent to your associated phone number. You'll also need to verify your email address, and that you are a legitimate user. An email will be sent to you, so check your inbox for a PayPal verification email and click on the link to Confirm Email Address, which will complete your new PayPal account setup.

Sending and Receiving Payments With PayPal

How to Send a Payment

Making payments through PayPal only takes a few seconds if your recipient has PayPal also. All you need is their email address and your payment will be on its way! You can track all your payment transactions from your account activity page.

How to Receive a Payment

A fun feature of PayPal is that you can actually request a payment from someone. All you have to do is enter the email of someone who owes you money, click "Request", type the amount requested, and it sends off a notification to the recipient. Another way to request money is through the PayPal Invoicing service. There is no charge, and you can send customized invoices via email or link share. The invoice can even be broken up into partial payments. In addition to those requests, you can also simply give someone the email address associated with your account, and they can pay you that way.

How to Withdraw Payments to Your Bank Account

Ok, so you've received a bunch of payments but now you need it out of your PayPal balance and into your bank account — how is it done? Quickly, and with only a few steps. Like so:

1. Log into your PayPal account
2. Navigate to the summary page and click "Transfer Money" (You can also get here by selecting the "Wallet" option in the top menu)
3. Click "Transfer to your Bank"
4. Choose which bank account you want your funds to be transferred to. (Only applicable if you have more than one card or bank connected to your PayPal account)
5. Enter the amount you want to transfer and click "Next"
6. Review the transfer amount and finalize your transfer by clicking "Transfer Now"

What Are the Benefits of PayPal?

PayPal is one of the most popular digital payment platforms in the world, and here are a few reasons why. We mentioned earlier that PayPal is free for consumers, and that it helps speed up the checkout time when making online purchases. Since its inception, PayPal has been focused on purchase protection and security.

Financial information is kept secure and unshared on an encrypted network. Two-factor authentication for logins and transactions also adds another layer of security. Shipping discounts are also offered, with additional discounts and free shipping service from UPS and USPS when applicable. All buyers are also protected from being scammed by the Buyer Protection program, and eligible goods are also returnable for refunds. Customers also have multiple payment processing methods, including Venmo, PayPal credit, debit cards, and credit cards — all of which can be used both online and in person.

What Are the Disadvantages of Using PayPal?

Despite being very easy to set up and free to create an account, there are some disadvantages to using PayPal as well. PayPal has tried to automate their customer service with quick links to frequently asked questions or problems, and generic emails when requesting additional help, which has led to poor ratings on various sites, like the Better Business Bureau. Users mention that customer service seems to be outsourced to overseas teams, and getting someone on the line to talk to is very difficult. Moreover, the overseas team that does answer calls doesn't have any power to make decisions on customer accounts, so no useful help is provided.

While touted as being a free service, there are hidden fees for many transactions that users may not be aware of. Non-PayPal transactions for subscription billing customers are charged a per transaction fee, plus recurring payment charges may apply. Their consumer fee page may be a bit confusing for users, since fee breakdown is not listed in one place; instead, it's broken down by type of transaction (buying, selling, sending, receiving, etc), and currency conversion also incurs additional fees.

The account verification process can also be a hassle. This process is done automatically, but oftentimes additional verification such as utility bills and government issued IDs will need to be sent in when required.

PayPal for Business

PayPal provides a comprehensive suite of solutions for businesses catering to their day-to-day needs. These offerings encompass payment gateways for both online and in-person transactions, business management services, and credit and financing alternatives. To create an account, business owners are required to provide an email address. One of PayPal's key features is enhancing online security during purchases. By offering a payment method that doesn't necessitate the disclosure of credit card or bank account numbers to the website or store, PayPal ensures both the safety of funds and user privacy.

What is PayPal Working Capital?

PayPal Working Capital is a type of business loan offered by PayPal. To qualify, you must have a PayPal Business account for at least 90 days and have processed $15,000 or more within the past year. Here are some quick facts on this business loan:

• No credit check
• Approval is based primarily on your PayPal account history
• Loans are funded within minutes of approval
• No late fees, prepayment fees, penalty fees, or periodic interest charges
• Loan amount ranges from $1,000 to $125,000
• Payments are pulled automatically based on a percentage of your sales

What Are PayPal eChecks?

PayPal eChecks work essentially the same way that writing a paper check does, but digitally. It's basically transferring money from the sender's bank directly to the recipient's bank. Like paper checks, echecks take about 3-6 business days to clear the bank before it can be credited to the recipient's bank. This is a great payment method for people who don't have a credit card, or those who want to pay directly from the bank to avoid additional fees.

PayPal Credit

PayPal Digital Credit

PayPal Credit is a proprietary, in-house digital reusable credit line that gives you the perk of no interest for six months if paid in full within that time frame on purchases of $99 or more. If approved, PayPal Credit will be added to your PayPal Wallet instantly and you can use it to shop at millions of stores online. Purchase Protection applies to all eligible purchases and the six months of special financing is an everyday benefit, not an introductory offer. An additional option to purchase is Payment Security, but this is not a free service. More details can be found here. The initial inquiry is a soft check, with no impact to your credit score if declined. Unlike most credit cards, PayPal credit has no annual fee; however, late fees for missed payments are applicable.

PayPal Credit Cards

PayPal used to have two — the Cashback Mastercard and the Extras Mastercard. As of June 2024, they are no longer accepting applications for the Extras Mastercard.

• PayPal Cashback Mastercard: 3% cash back when you check out with PayPal, 1.5% cash back on all other purchases, and no annual fee. Yay!

PayPal Debit and Prepaid Cards

• PayPal Debit card: Use it anywhere Mastercard is accepted, with no minimum balance or credit check required, and access to cash globally.
• PayPal Prepaid Mastercard: Load and reload using the free direct deposit service and transfer from your PayPal account to the prepaid card account. You can also keep track of your money with the free mobile app.

What is PayPal's Pay in 4?

PayPal Pay in 4 is a feature that offers a deferred payment option for users. It allows users to spread the cost of a purchase into four separate installment payments with select merchants. You must be at least 18 years old or meet the state's legal age requirement, and your PayPal account must be in good standing.

Your total cost of the online purchase will be divided into four equal payments. The initial installment is charged at the time of purchase, followed by three additional payments due bi-weekly until the total is paid. This service is fee-free and interest-free, applicable to purchases ranging from $30 to $1,500.

The option is not eligible for every transaction, so the option will only appear at checkout for products that qualify. Also, applicants must apply for this installment loan. PayPal will review the applicant's information, financial status, and account history to assess loan eligibility. Eligibility is determined almost instantaneously. Once approved, the first installment is due at checkout. Subsequent payments are scheduled automatically using the initial payment method. Customers have the flexibility to make additional payments or settle the full amount early by accessing their PayPal account, selecting their Pay in 4 plan, and opting to make a payment at any point during the loan period.

How Does PayPal Instant Payment Work?

An instant transfer is quite similar to an echeck, serving as a method to expedite payments directly from your bank account via PayPal. During these transactions, the seller's account is promptly credited even as the transaction is being processed. However, using this method does incur fees. The prerequisites for this transaction type include a verified U.S. bank account and sufficient balance to cover the entire payment. For instant payments, having a valid alternative funding source, such as a credit or debit card is beneficial. This precaution ensures that you have a fallback option should the bank reject your payment request. You have the flexibility to update all related information just before initiating an instant transfer.

PayPal Shipping Services

Free shipping services are offered by PayPal when purchased straight through your PayPal account. Tracking numbers are automatically saved to comply with PayPal Seller Protection. UPS and USPS also provides shipping discounts when purchased through PayPal, making this service even better.

PayPal Invoicing Services

PayPal invoicing is another free service that PayPal provides. Custom invoices can be created and sent quickly via email or shared link. Billing history, partial or split payments, optional tipping, and automatically sending past due reminders are all features of this service.

PayPal Fees

PayPal's revenue comes from transaction fees, but most of these come from what it charges its merchants, and not the consumers who use PayPal to pay for their goods and services. In your home currency there is no fee for using PayPal to pay for a transaction, or to send cash to a friend or relative. Transferring money to and from your PayPal account and bank account does not incur any fees either, unless you choose instant transfer. There are transaction fees however, for currency conversion and for the sellers and merchants. The PayPal-branded credit and debit cards are free to use, but can incur fees and interest, similar to other branded credit cards.

Typical Fees Associated With PayPal in the US

• 2.9% per swipe for mobile or in-store payments
• 3.49% + $0.49 per transaction for online payments/invoicing
• 3.5% + $0.15 for keyed sales on mobile or in-store payments

International Transaction Fees

You should expect to pay some sort of international transaction fee when using the platform. Since PayPal is a brand available in over 200 countries, companies have the option of making cross-border payments and international transfers, but these transactions are not free. Depending on the method used, country, currency, and whether or not both parties have a PayPal account, some type of fees will apply. Converting payments in another currency is subject to the currency conversion spread depending on type of transaction, and can be anywhere from 3% to 4%.

PayPal vs Competitors and Who They Are

The majority market share holder for the digital payment space is PayPal, but a close second is Stripe. Stripe is headquartered in San Francisco, and also has an overseas headquarters in Dublin, Ireland.

Stripe Connect is an offshoot of Stripe, designed to better serve small businesses and international businesses with its acceptance of multiple international cards and currencies. Fees are similar to PayPal, but Stripe is more customizable by merchants.

Authorize.net and Square Point of Sale systems are also in the same space, but much lower on the list of competitors. Google Pay and Clover are also hanging around, along with a few others.

Is PayPal Safe to Use?

Yes. Security has always been the forefront of PayPal's focus, with the platform encrypting and protecting customers financial data, payment details, and personal information. Transactions and activity are being monitored 24/7 to help protect your account and keep it secure. Financial information is never sold or shared, and suspicious money requests and scammer spotting is always reported. Real-time early fraud alerts and suspicious activity will notify users immediately. The latest authentication methods and tools help keep you safe, like passkeys and multi-factor authentication.

Passkeys are a new secure login standard, which allows you to securely log in to PayPal without entering a password. You're able to login to PayPal using the same biometrics or device password you use to unlock your device. This adds another layer of security and makes logging in easier than having to remember yet another password.

PayPal is a highly trusted brand, giving convenience and security to buyers and sellers around the world — it's the reason why PayPal remains one of the most popular payment services worldwide!

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