What Is PayPal and How Does It Work?

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Founded in 1998, PayPal was one of the first widely adopted online peer-to-peer payment systems. Today, this online payment platform has over 300 million active account holders, according to the website.

What Is PayPal?

PayPal offers a peer-to-peer digital payment network that allows people to transmit money to and from family and friends at no cost. You can also use it to make purchases online or in physical stores. In recent years, the online financial service has added features like the ability to buy and sell crypto, make purchases using bitcoin, bitcoin cash, ethereum or litecoin, open a PayPal line of credit or use it to “buy now, pay later” at your favorite online stores that accept the online payment system.

How Does PayPal Work?

To use PayPal to send money to family or friends, you’ll first need to start by creating a PayPal account. Then, link a bank account, debit card or credit card to your PayPal account. After that, you can send and receive money securely between family and friends or make purchases in-store or online.

• Buying from businesses: When you purchase goods or services from a business, you qualify for Buyer Protection. Through the Buyer Protection program, you can request a refund within 180 days if an item or service you purchased is not received or is not the correct item.

• Buying in-store: If you have a PayPal debit card or credit card, you can also make purchases in brick-and-mortar stores using your balance or line of credit. If you don’t have enough money in your account, you can also set up PayPal to fund purchases using a debit card, credit card or checking or savings account of your choice.

Step-by-Step Guide

PayPal acts as a secure go-between to facilitate transactions between your bank and a third party, whether that’s an e-commerce merchant, a store, a service provider or a friend or family member. Setting up your account is a simple process and can be done in just a few steps.

1. You can set up an account for free on PayPal’s website or by downloading the PayPal app from the App Store or Google Play. You will need to enter some basic personal information.
2. Once you’ve got an account, you’ll want to link a bank account, credit card or debit card to the account. You can link one card to begin, or link as many accounts as you’d like for more flexibility in managing your money.
3. When you want to make a payment online, you can simply click the “PayPal” button, log in to your account and pay for your purchase. There’s no need to enter your credit card information on the e-commerce website or worry about creating a virtual transaction number for added security.

How Do You Send Payments on PayPal?

If you are sending money to a friend or family member, all you need is their email address. Ideally, they already have a PayPal account, and you would use the email address they used for their account to send money.

Then, enter the amount of money and the currency and click “friends and family” to send the money securely without fees. They will get an email from PayPal indicating they have received money. If they don’t have an account set up, they will need to do so using the email address where you sent the funds.

Make sure to select “friends and family” if you are not sending money to a business or service provider. Otherwise, the recipient will pay fees on the amount.

How Can You Accept Payments Through PayPal?

As PayPal is an online platform, there are a few ways to accept payments. Anyone with your email address can send you money as a PayPal user. Make sure they send it as a “family and friends” transaction so you won’t have to pay taxes on money sent as gifts, reimbursements of purchases or things like splitting the bill at dinner.

You can also set up a PayPal.me link so people can pay you easily with one click.

Potential PayPal Fees

For transactions in a single currency between family and friends, PayPal does not charge fees, but some transactions do come with a fee.

• Currency conversion: For transactions requiring a currency conversion, PayPal collects a fee of 3% above the base exchange rate from the recipient of the money.
• International transactions: For personal international transactions, the person sending the money also pays a fee of 5% of the transaction, with a minimum fee of 99 cents and a maximum of $4.99. These charges apply whether you use a PayPal balance, bank account, credit or debit card or Amex Send Account.
• Paying for goods or services: When you pay for goods or services, the seller pays the associated fees, which are currently 2.99%. If a merchant sends an invoice or a consumer uses PayPal Checkout to make an online purchase, the seller pays 3.49% plus a fixed fee of 49 cents in the U.S. for domestic transactions.
• Credit card payments: If you use your PayPal credit account or a credit card that is linked to your PayPal account for any transaction, business or personal, you will pay a fee of 30 cents plus 2.9% of the transaction.

In short, the sender doesn’t typically pay any fees when paying or sending money with PayPal, unless you are using a debit or credit card or if there is an international transfer involved.

Final Take

PayPal is a fast, easy, secure and well-established way to make purchases and to send and receive money. If you don’t already have a PayPal account, it might be worth establishing one. The payment method is becoming more widely accepted every day and you can also find deals by shopping through PayPal at your favorite online retailers.

Caitlyn Moorhead contributed to the reporting for this article.

Information is accurate as of Feb. 28, 2023. 

Editorial Note: This content is not provided by any entity covered in this article. Any opinions, analyses, reviews, ratings or recommendations expressed in this article are those of the author alone and have not been reviewed, approved or otherwise endorsed by any entity named in this article.

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