What Is PayPal and How Does it Work?

how does paypal work (photo: www.jotform.com)

What is PayPal ?

PayPal is an online payment system that allows individuals and businesses to make and receive payments through online money transfers. It operates through a website and mobile application and requires users to create an account and link it to their bank account, credit card, or both. 

Once verified, users can send or receive payments either online or in-person, with PayPal facilitating the transaction. 

PayPal is widely accepted by both small and large retailers in both online and physical settings. Additionally, PayPal offers credit and debit cards under its own brand.

How Does PayPal Work?

PayPal operates as a payment platform for both consumers and merchants. Merchants can accept payments through PayPal either by using a PayPal card reader in their physical stores or by enabling PayPal as a payment option on their websites for online transactions.

Consumers can easily pay bills and send money via PayPal. The platform allows cash to be transferred to any email address or phone number, regardless of whether the recipient has a PayPal account or not.

In order to create an account, users are required to have an email address and must also provide either a credit card, debit card, or bank account information to complete the setup process. PayPal conducts verification procedures to confirm the identity of the account holder before the service can be utilized.

If a retailer offers PayPal as a payment option, shoppers can select it to complete their online purchases. The transactions are processed quickly, taking only a few minutes, and the company assures that funds can be transferred for payment or withdrawn to a bank account instantly.

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PayPal for Business

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PayPal provides various solutions for businesses to manage their day-to-day operations, such as payment portals for both online and in-person transactions, business management services, and credit and financing options. To create an account, business owners are required to provide an email address.

PayPal strives to enhance the safety of online purchases by providing a payment method that does not necessitate the disclosure of credit card or bank account details by either the payor or payee. This approach ensures that the funds are secure, privacy is safeguarded, and transactions are completed faster than conventional methods due to the company's large customer base.

PayPal Fees

PayPal generates a significant portion of its revenue from fees charged to merchants, rather than from the customers who use it for payment.

When utilizing a PayPal balance or a linked bank account, and the payment is in your home currency, no fees are charged for paying with PayPal. Similarly, if you transfer funds to a friend or family member instead of a business, again in your home currency, there are no charges. Additionally, there are no fees for transferring money between PayPal and your bank account.

For transactions that require currency conversion, there is a 4% fee applied. When you pay through PayPal using your linked credit card, there is a fee of 2.9% and an additional fixed fee that varies by country, amounting to $0.30 in the US. To avoid these charges, ensure that your PayPal account is set to default to your checking account instead of your credit card.

PayPal-branded credit and debit cards have their fee structures that appear to be standard in the industry. In addition, fees apply to less frequent transactions, such as purchasing and selling cryptocurrencies and making charitable donations.

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Comparing PayPal with Its Rivals

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At present, PayPal accounts for 32.3% of the worldwide online payment services market. Despite this, it is still outperformed by Stripe and Stripe Connect, which collectively own over 40% of the market. Adyen, which is Dutch-owned, comes in third with a market share of 11.6%. All other competitors, including Square, Braintree, and Venmo, have a single-digit market share. This might not signify that PayPal and Stripe are superior, but it could imply that their payment options are more easily accessible in stores and online.

Stripe is a payment platform headquartered in Dublin, Ireland. Stripe Connect is a subsidiary of Stripe that caters to the needs of small online businesses, particularly those that want to expand globally. This service enables these businesses to accept numerous credit cards across 135 currencies with Stripe serving as an intermediary.

A Forbes comparison between Stripe and PayPal indicates that their services and fees are comparable, with PayPal being a better and more user-friendly choice for small merchants, while Stripe offers more flexibility for customization by merchants.

Special Considerations

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Even though PayPal is not a bank, it is subject to many of the same regulations for consumer protection that banks follow. One example is the level of liability you have for an unauthorized transaction, which is determined by how quickly you notify the bank that unauthorized activity has happened in your account. In order to reduce your liability, it is important to inform PayPal as soon as possible if you have any concerns. PayPal users are also advised to monitor their accounts regularly.

History of PayPal

PayPal originated in the late 1990s as a payments system for users of Palm Pilot, a handheld device, developed by Confinity, a software company. After merging with X.com, an online banking company, the company adopted the name PayPal in 2000.

PayPal gained popularity as the preferred payment option for eBay buyers and sellers, and in 2002, eBay acquired PayPal and established it as the official payment service of the auction site. eBay worked to expand the reach of PayPal beyond the site.

In 2015, PayPal became an independent company and its shares are now traded on Nasdaq under the ticker symbol PYPL.

Over the years, PayPal has acquired several other companies that cater to different aspects of financial transactions, digital money transfer, and payments markets. These acquisitions have brought in technological advancements and additional features that were integrated into the PayPal platform as the companies were assimilated.

In 2013, PayPal acquired BrainTree, which owns Venmo, a rival service.

In addition to its original platform, PayPal's brands now include Xoom, Zettle, Hyperwallet, Honey, Happy Returns by PayPal, Chargehound, Paidy, and Simility.

PayPal charges no fee for regular transfers, but adds a fee for "instant" transfers.

Is PayPal a Good Choice for a Small Business?

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PayPal is a major player among the various competitors for small business clients due to its ease of use and access to additional features that can assist with running a small business.

However, one downside to using PayPal is its higher merchant fees in comparison to certain credit card payment services. It's important to keep in mind that while some of PayPal's basic services are free to users, the cost is ultimately borne by the merchants.

Is PayPal a Good Choice for a Consumer?

If you're shopping online in the U.S., PayPal may be the most commonly available payment option besides using a credit or debit card. It could be the most cost-effective choice since you can link it to your checking account and avoid fees. (Make sure to set your checking account as the default payment option to avoid additional fees for using a saved credit card.)

For in-person shopping, there are many payment apps available, so it's best to compare them and choose the one that fits your needs.

Is PayPal Safe to Use?

PayPal utilizes end-to-end encryption, and users can choose to enable two-factor authentication to enhance the security of their transactions. In today's electronic environment, it is as secure as any other electronic transaction.

Summary

PayPal is a major player in the highly competitive market of payment apps for both online and offline use.

Users can access its basic services, such as paying for goods using a checking account and transferring funds, for free. Additional services, including PayPal credit and debit cards, and transactions involving currency conversion, come with fees that are comparable to industry standards.

Merchants who use PayPal to accept payments must pay transaction fees, but they also gain access to a variety of small business services offered by the company.

For online transactions, PayPal is the leading payment service. However, small business owners should consider competitor reviews when selecting from the many payment apps available.

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Source: www.investopedia.com