# Understanding PayPal: How It Works and Benefits for Users

![PayPal](https://www.investopedia.com/thmb/bonWusc4zoV7vkmNEToA5wsxjtw=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/paypal.asp-final-1101556384f049bf9f24d7ad7a59494c.jpg)

*— Investopedia / Jake Shi*

> **Definition**
>
> PayPal is an online payment platform that allows users to send and receive money, make purchases, and manage transactions securely through a connected bank account or credit card.

## What Is PayPal?

PayPal is a leading online payment platform enabling money transfers and other financial transactions. Users connect their PayPal accounts with a checking account or credit card, or both, in order to facilitate their transactions online. Consumers, businesses, and merchants can all use PayPal, whether online or in stores. PayPal is known for providing its customers with a high degree of transaction security and convenience.  

### Key Takeaways

*   PayPal is a widely used online payment platform that facilitates transactions between individuals and businesses, providing a secure alternative to sharing credit or debit card details directly.
*   Originally launched for Palm Pilot users in the late 1990s, PayPal has grown to become the second-largest online payment system, having once been affiliated with eBay before becoming an independent company in 2015.
*   Key features for consumers include easy money transfers, the ability to pay without revealing bank details, and buyer protection, while merchants benefit from PayPal's versatility in handling both online and in-store payments.
*   PayPal's revenue model largely depends on merchant fees, while consumers enjoy many services without charge unless opting for special transactions like instant transfers or currency conversions.
*   Compared to competitors like Stripe, PayPal offers simplicity for small merchants and consumers, although merchants might face higher transaction fees.

## Understanding PayPal's Functionality

PayPal offers payment services for consumers and for merchants who accept PayPal. Merchants use PayPal card readers in stores or add PayPal as a payment option online.

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. If they don't have an account, they'll be asked to create one after you send the money.

Users need an email address to sign up for an account and must provide a credit card, [debit card](https://www.investopedia.com/terms/d/debitcard.asp), or bank account to complete the setup. Your mobile number will also be verified. PayPal verifies the information to make sure the person setting up the [account](https://www.investopedia.com/terms/a/account.asp) 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. Funds may be available immediately for business owners after a sale. In some cases, some or all of the funds may be held for up to 21 days. This is most common for newer sellers without a history.

### Exploring PayPal Business Solutions

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](https://www.investopedia.com/terms/f/financing.asp) options. Business owners must also provide an email address in order to create an account.

PayPal attempts to make online purchases [safer](https://www.investopedia.com/articles/personal-finance/011215/which-safer-paypal-or-credit-card.asp) by providing a form of payment that does not require the payor or payee to disclose credit card or bank account numbers to the website or store. Therefore, the money is secure, privacy is protected.

## Breaking Down PayPal Fees

PayPal makes much of its revenue from fees it charges merchants, rather than from the consumers who pay with it. No fee is charged when you use PayPal to pay 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. Transferring money between PayPal and your bank is free unless you use instant transfer.

Other transactions incur fees:

*   When making a purchase or sending money, there's a currency conversion fee of 4% charged to the buyer or sender.
*   Sellers pay a fee from 2.29% to 3.49% plus a fixed fee per transaction, based on the payment method used. Credit and debt cards transactions cost 2.99% plus a fixed fee.

The PayPal-branded credit and debit cards are of course free to use, but can incur fees for certain things like any other card. Interest can apply with the credit card as well.

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

## Comparing PayPal to Competitors

PayPal holds a 37.8% share of the market for online payments, making it the second-largest online payments platform as of June 2024. Stripe is slightly ahead with a 37.9% market share. The next closest competitors Authorize.net and Square Point of Sale are far behind with 5.6% and 4.1% market share respectively.  

This means you'll likely find more merchants offering PayPal and Stripe than other platforms.

### About Stripe

Stripe is a payments platform with two headquarters located in San Francisco and 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.

## Important Considerations for Using PayPal

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](https://www.investopedia.com/terms/l/liability.asp) 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.  

## Tracing the Evolution of PayPal

A version of PayPal was launched in the late 1990s for Palm Pilot users by 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](https://www.investopedia.com/terms/s/spinoff.asp) as an independent company. Company shares trade on the Nasdaq under the ticker symbol [PYPL](https://www.investopedia.com/markets/quote?tvwidgetsymbol=pypl).

PayPal has acquired companies serving different parts of financial transactions, 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](https://www.investopedia.com/venmo-vs-paypal-5114030), in 2013.

In addition to those two, PayPal's brands now include Xoom, Zettle, Hyperwallet, Honey, Chargehound, Paidy, and Simility.  

> **Important**
>
> PayPal charges users no fee for a regular transfer but adds a fee for "instant" transfers.

## Is PayPal a Good Choice for a Small Business?

PayPal is one of a number of competitors for small business clients, but it's a big one.

Its advantages to a merchant include great ease of use and access to a range of additional features that can help you run a small business.

Its disadvantages include relatively high merchant fees compared to some credit card payment services. (Remember, some basic services are free to users, so merchants bear the burden.)

## Is PayPal a Good Choice for a Consumer?

If you're shopping online in the U.S., PayPal is likely to be the only choice at the checkout other than directly using a credit or debit card for payment. If you card or bank account is already saved in PayPal, it might be a bit faster to go with PayPal rather than reentering your payment information on the website. Additionally, it can be more secure since you don't have to share payment information with the seller, when using PayPal. Also, PayPal offers protection for buyers who don't receive what they ordered.

If you're shopping in the real world, you have many payment apps to choose from. Best to compare payment apps for the one that suits you best.

## Is PayPal Safe to Use?

PayPal uses end-to-end encryption and users have the option to enable two-factor authentication to increase the security of their transactions. It's as safe as electronic transactions get these days.

## The Bottom Line

PayPal plays a major role in the digital payment landscape, both online and in stores. Users can benefit from free basic services but can also take advantage of services such as currency conversions and instant transfers for a fee. PayPal was originally introduced for Palm Pilot users in the late 1990s, and has grown to become the second-largest online payment system. It was once affiliated with eBay before it became an independent company in 2015. PayPal employs security measures like end-to-end encryption and two-factor authentication to enhance its customers' confidence in its services. Business owners thinking about expanding their payment options should consider PayPal, but compare its offerings to other online platforms such as Stripe, before reaching their decision of a provider.

> **Article Sources**
>
> 1.  Paypal. "[New PayPal Account – Payments on Hold and Accessing Your Money Quicker](https://www.paypal.com/us/cshelp/article/new-paypal-account-%E2%80%93-payments-on-hold-and-accessing-your-money-quicker-help848#:~:text=As%20you%20begin%20your%20selling,for%20up%20to%2021%20days.)."
>     
> 2.  PayPal. "[PayPal Consumer Fees](https://www.paypal.com/us/webapps/mpp/paypal-fees)."
>     
> 3.  PayPal. "[PayPal Merchant Fees](https://www.paypal.com/us/webapps/mpp/merchant-fees)."
>     
> 4.  Slintel. "[Market Share of PayPal](https://www.slintel.com/tech/payment-management/paypal-market-share)."
>     
> 5.  Stripe. "[Connect](https://stripe.com/connect)."
>     
> 6.  Forbes. "[PayPal vs. Stripe (2024 Comparison)](https://www.forbes.com/advisor/business/software/paypal-vs-stripe)."
>     
> 7.  PayPal. "[Your Security Is Serious Business](https://www.paypal.com/lc/webapps/mpp/paypal-safety-and-security)."
>     
> 8.  PayPal. "[Protection You Need, Peace of Mind You Deserve](https://www.paypal.com/us/webapps/mpp/paypal-safety-and-security)."
>     
> 9.  Encyclopedia.com. "[X.com](https://www.encyclopedia.com/economics/encyclopedias-almanacs-transcripts-and-maps/xcom)."
>     
> 10.  PayPal. "[History & Facts](https://about.pypl.com/who-we-are/history-and-facts/default.aspx)."
>      
> 11.  PayPal. "[Family of Brands](https://about.pypl.com/who-we-are/family-of-brands/default.aspx)."
>      
> 12.  PayPal. "[PayPal Consumer Fees](https://www.paypal.com/us/webapps/mpp/paypal-fees)."