How Does PayPal Work Explained in Less Than 3 Minutes

PayPal is one of the most popular payment services on the Internet today. Individuals use it for personal transactions and businesses to receive worldwide payments.

In fact, PayPal is integrated into hundreds of shopping cart software apps and used by millions of people worldwide. 

But, how does PayPal work? This guide will explore their intricacies and guide you through using the platform.

Let’s start.

What Is PayPal?

PayPal is an online financial service that helps users buy goods or services online. It allows you to send and receive money from your bank account, credit card, or other forms of payment. The platform doesn’t require a merchant account to process payments either. 

The PayPal service system uses encrypted and secure technology, so all payments are reliable.

The company was founded in 1998 by Elon Musk, the visionary behind innovative companies such as Tesla Motors, SolarCity, and SpaceX. 

Today, PayPal is the world's largest payment processor. It has 184 million active accounts in 26 currencies. It’s also one of the more popular options for online and offline merchants to allow consumers to pay for items. It’s estimated that over 2 billion people worldwide have a PayPal account.

PayPal is accepted at various places - from restaurants to department stores to medical offices.

However, how does this widely used payment platform operate?

How Does PayPal Work?

PayPal enables users to make and request easy and quick payments online. All you need to do is sign up, add your bank account and credit or debit card details. You can add multiple payment methods as well.

When shopping online, a participating merchant's website will display the PayPal logo. To pay using this service:

• Click on PayPal at checkout. 
• You’ll be required to log into your account to confirm the payment. 
• After confirmation, the software will deduct the amount from your wallet. 

So, how does PayPal work when receiving money?

It allows personal account users to receive money from family and friends. All they need is your email address. As soon as the sender makes the payment, PayPal will notify you via email. The amount will be reflected in your account. Once your PayPal wallet is funded, you can use the money to buy something or transfer the funds to your bank account. 

To send money to another PayPal user, all you need to do is:

• Log into your account.
• Ensure that you link your bank account/card to your PayPal account.
• Select the Send and Request Money option. 
• Enter the recipient’s email address, and they’ll credit the recipient after completing the process.

But is PayPal free?

Receiving money into your account costs a fee. However, most of the other uses and services are free. You won’t be charged as long as the transaction doesn’t require a currency conversion. 

Now that we've explored how it works, the next step will be creating a PayPal account. 

Creating PayPal Account

Creating a PayPal account is free. You’re only required to provide your full name, phone number, address, and email. You’ll also need to input your credit or debit card details as well as your bank account information. In addition, PayPal requires proof of identification to verify your account once set up.

This app offers two account types: 

• PayPal personal account 
• PayPal business account 

Let's explore both options.

PayPal Personal Account

This type of account is best for individuals who shop online and send money to friends. It’s more accessible and easier to use than a business one. 

Here's how to set up a PayPal account:

1. Visit www.paypal.com and select the Sign-Up option at the top right corner of the home screen. 
2. Next, you’ll be asked to choose the type of account you want to create. 
3. Select Personal Account and click on Next.
4. You’ll be asked to input and verify your phone number. 
5. After that, add your name, email address, and password.
6. Click Continue to finish creating your account. 
7. To complete the setup process:

• Click on the blue button that says Get Started.
• Add your card and bank details. 
• PayPal will send a link to your email address asking for verification. 
• Click the link and follow the prompts.

PayPal Business Account

A PayPal business account helps sellers receive payments for their products and services. It enables businesses to accept debit and credit card payments as well as direct payments from a customer's account. It also accepts online check payments. 

With a PayPal business account, you can create online payment buttons for your website. That way, your clients can pay with just one click. You can also transfer the funds to your main business account or personal bank account. 

To create a PayPal business account:

1. Go to www.paypal.com and click on the sign-up button. 
2. Type in the requested information. This includes the business owner's name, email address, business address, and customer service contact details. 
3. After you’ve filled and submitted the sign-up form, PayPal will send a verification email. Click on the link provided.
4. Next, log in to PayPal again and follow the prompts to input your business bank account details. You can also use your personal bank account information. 

Once that’s done, PayPal will send a verification request to your bank. This process typically takes three to five days to complete.

Keep checking your bank account transaction history for two small deposits from PayPal. Once you've seen it, follow the instructions on the verification page to finish creating your business account.

Now, how does PayPal work when sending money?

How to Send Money via PayPal?

There are two primary ways to send money via PayPal. It allows you to choose whether to send money to pay for goods and services or to family and friends. Each option has its perks.  

How to Send Money via PayPal to Friends and Family

All you need to send money to friends and family is the recipient's email address, PayPal username, or phone number. Sending money this way is free. 

The minimum transfer amount on PayPal is $0.01. For unverified accounts, users can send a maximum of $4,000. Once an account has been verified, the PayPal transfer limit is increased to a maximum of $60,000 per transaction. The process involves providing documents that verify and authenticate your identity.

To transfer money to family and friends, follow these steps:

1. Log in to your PayPal account.
2. Click on the Send & Request button at the top of the page.
3. Select Send to Family and Friend (Send to Family and Friends Internationally option if they’re in another country).
4. Next, enter the recipient's email address or phone number.
5. Type in the amount you wish to transfer on the next page and click Continue.
6. Then you’ll be asked to review the information. Once you confirm that everything is correct, click Send Money Now.

How to Send Money via PayPal for Products and Services

Sending money via PayPal for products and services is simple. All you need is the recipient's email address. 

When paying for products and services, the PayPal sending limit is the same as sending money to friends and family. For unverified accounts – $4,000 daily maximum; for verified – $60,000.

How does PayPal goods and services work?

There are many ways you can pay for products and services, such as via a website. When shopping online with a business that accepts PayPal payments, the "Buy Now" button typically takes you to a checkout page. Just follow the PayPal button, and it’ll take you to your account, after which it’ll automatically process the payment as Products and Services.

Another way to pay for products and services is through your app or the website. Here's how to make a PayPal payment:

1. Log in to your personal PayPal account.
2. Click on the Send and Request button at the top of the page.
3. Select the Pay for Goods and Service option.
4. Type in the recipient's email address and click Next.
5. Input the amount you want to send to the recipient.
6. You can also add extra notes in the text box.
7. Confirm your transaction and click Send Money Now.

You’ll receive a notification that the funds have been transferred. The recipient will also be notified via email.

Getting Paid via PayPal?

If you already have a PayPal account, all you need to do is give the sender your email address. 

Note that you can receive money via PayPal even if you don’t have an account. When the money is sent, you’ll be notified via email. However, you’ll need to create an account to claim the payment. 

To get paid via PayPal, you’ll have to request payment. You can do this on the mobile app or the web version. 

Here are the steps:

1. Log in to your PayPal account.
2. Click on the Send and Request button and select Request.
3. Next, type in the sender's email address and click Next.
4. Type in the amount you want to request and the currency type.
5. You can also add a note to explain what the payment is for.
6. Finally, click Request Now.

In terms of fees, receiving money for personal use is free. Although, PayPal charges users for receiving money for goods and services. There are also fees attached for other types of transactions.

What Are PayPal Fees?

PayPal fees are the charges placed on certain transactions. They don’t affect online purchases made with retailers. There aren’t any fees attached when you send money to or receive money from family and friends in the same currency. 

Some of the transactions that have fees are outlined below.

Fees for Purchases

When making an online purchase from a seller in another country, PayPal charges a fee for currency conversion. This is about 3% of the total amount paid. 

Fees for Personal Transactions

Personal transactions made on PayPal are primarily free. However, charges might be attached depending on where you’re sending the funds to and where it’s drawn from. For example, domestic transactions withdrawn from your bank account or PayPal wallet balance are free. But, international transactions come with a 5% fee – usually between $0.99 and $4.99.

If you send money from a credit or debit card to a PayPal account, a 2.9% charge is attached. International transactions made from a credit or debit card are charged at 5%. This also has an additional fixed fee that varies based on your location. For payments made from the U.S., the fixed charge is $0.30.

Fees for Withdrawing Money

Withdrawing money from your PayPal account to your bank account is free. However, it’ll typically take 2 to 3 days to process the withdrawal. If you want to withdraw instantly, a 1% fee is attached. You can also draw a check from your PayPal balance, which costs $1.50.

What Is PayPal Credit?

PayPal Credit is a reusable credit line service to buy items but pay for them later. It works like a credit card but doesn’t require any card. There’s a variable interest rate of 17.9% per year when using PayPal Credit. For new accounts, the interest rate is 23.99% per annum. 

Many stores already allow their customers to make purchases with PayPal Credit. Some even offer special discounts and reduced interest rates. 

Why Use PayPal?

There are lots of benefits that come with using PayPal. The major ones are outlined below.

Easy to Use:

PayPal is seamless and easy to use. It’s a straightforward way to send and receive money from anywhere in the world. 

Secure:

All credit card and bank information provided by users are encrypted and cannot be accessed. PayPal also offers an extra security level that protects its users from fraud. This means that if you make a purchase via PayPal and it’s fraudulent, they’ll guarantee your money back. 

But is it safe to link a bank account to PayPal?

Absolutely. PayPal uses extensive security measures that ensure that your bank information isn’t revealed to anyone. It also protects users from unauthorized payments made from their accounts. 

Affordable:

PayPal doesn’t charge users for sending money to friends and family. When it does charge for transactions, the fees are relatively affordable.

PayPal Alternatives

Several other payment services operate in a similar niche. One of them is Venmo. It’s a convenient payment service that has a unique social networking feature. It doesn't charge for requesting money but charges a fee for instant transfers. 

However, PayPal owns Venmo. Besides being a subsidiary of PayPal, it aims at making sending money safe, simple, and social.

Skrill

This is another payment software that lets its users send money easily. It offers the Skrill Visa Prepaid Card to its users. This lets users earn rewards with each purchase and are very helpful when traveling. One significant advantage of this app is that it doesn’t charge any fee for foreign transactions. However, there’s a $5 inactivity fee. To avoid paying this, be sure to use your account regularly. 

Payoneer

Payoneer is another go-to payment service for e-commerce businesses and freelancers. They offer integrations for digital marketing services and vacation rentals as well. Payoneer's reach spans over 150 countries. Users can easily transfer local and international currencies. However, their fees aren’t fixed and vary based on the transfer source.

Wrap Up

So, what is PayPal?

PayPal is an easy-to-use, secure online payment service. It allows users to send money to family and friends locally and internationally. It also allows them to make payments for goods and services. Users can also receive money easily in any currency. 

Is PayPal account free?

Opening and setting up a PayPal account is free. Note that there are specific fees attached to different transactions. However, sending money to family and friends locally is free. International transactions attract a 5% fee that covers currency conversion. 

Some tested and trusted alternatives are Payoneer, Skrill, and Venmo.