How Does PayPal Work? Demystifying the World’s Most Popular Middleman Service

how does paypal workBefore the internet existed, sending money to people around the world was not such an easy task.  The only options were to use a wire-transfer or send a check in the mail, which took some time and effort.  With the internet and services like PayPal, sending money is easy, quick, and free.  So how does PayPal work, exactly?

Founded in 1998, PayPal currently has over 100 million active accounts in 190 markets around the world.  It was acquired by eBay in 2002 for $1.5 billion.  It is considered the world’s most popular middleman service for online purchasing.  Companies such as Wal-Mart, Best Buy, Netflix, Dell, and Starbucks all use PayPal services on their website.

Take our E-commerce Merchant Services course if you want to learn more about how to use PayPal Mobile and PayPal Traditional Payment Methods.  You will see how convenient and easy it is to use from any computer, tablet, or smartphone.

What Is PayPal?

PayPal is an online payment system that allows an individual or business to transfer funds.  You can send money to anyone with an e-mail address, regardless if they are signed up on PayPal’s website.  If you want to receive money though, you will need a PayPal account.   The basic PayPal accounts are free to have and most transactions that are made have no fees, including purchases from merchants that accept PayPal payments.  There are also other types of accounts like Premier and Business accounts, but we will get into that in a bit.

To add money into your account, you can link your bank account or credit card.  Some people may be wary of trusting a company with their bank account or credit card information, but the company promises to keep everything private.  They also have multiple guarantees in place so buyers and sellers can make transactions without having to worry about any problems.  This includes the PayPal Security Key, which is a portable device that generates a six-digit code every 30 seconds that is needed to access your account.  This service does have a monthly fee of $29.95.

If you want to withdraw money from your PayPal account, you can send the money to your bank account, add it to your PayPal debit card if you have one, or request a check in the mail.  It usually takes a few days for the money to post to your account .

PayPal also offers a Premier account which allows you to accept credit and debit card payments.  They also get to use features such as shopping cart and payment reporting tools.  This type of account is more suited for amateur sellers who have a business and deal with customers on a regular basis.

The last type of account is a PayPal Business Account, which is more for individuals running a large scale online business or online store.  A lot of “power sellers” on eBay use this type of account to receive payments.  This type of account allows you to operate under a business name and you can allow senders to set up recurring payments.  Both Business and Premier accounts also have benefits such as unlimited PayPal debit card use, a toll-free customer service number and extended customer service hours.

How Does PayPal Make Money?

There are two ways PayPal makes its money.  The first way is the fees they charge to a payment’s recipient.  Although most transactions are free, merchants pay a fee for each transaction.  The fee is usually thirty cents plus a 1.9% to 2.9% surcharge fee, depending on the special surcharge formula they use.

The other way PayPal earns profit is by earning interest against the money that you have sitting in your account.  Knowing that there are over 100 million members on PayPal, if every member kept $5 in their account for a year and PayPal gets an interest rate of 1.75%, they would make $8,750,000 a year.  The person who owns the account does not make any interest by letting their money sit in there. Pretty smart…for PayPal.

PayPal Courses

If you would like to learn more about PayPal, here is a list of some of the courses we offer:

Instant PayPal Profits – Learn how to create a product or service and use PayPal to make money for yourself.

How To Set Up PayPal Instant Payment Notification With PHP – This course is mostly for web developers who have some knowledge of PHP programming.

Build E-Commerce Website With PHP, MySQL, jQuery and PayPal –  You will learn how to create your own E-commerce web application and use PayPal to accept payments and sell products.