What is PayPal & How does it work?

what is PayPal how does it work
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PayPal has dominated the digital payment landscape for over two decades and shows no sign of fading anytime soon. With over 360 million active users across over 200 countries globally, it stands as the most popular online payment option among individuals and businesses.

Since its inception in 1998, this comprehensive payment solution has given consumers a convenient way to send money to others and make purchases online.

PayPal allows buyers to make secure payments from their bank accounts without sharing any financial information with merchants. It also facilitates business owners to receive payments from customers and create invoices for services. In this guide, let us take a deeper dive into the working of PayPal.

What is PayPal?

One of the top choices for digital money transfers and online shopping, PayPal is an online payment system that provides an easy and secure way to pay for purchases and send and receive money. It lets you create a secure internet account with your bank and credit/debit card details to perform financial transactions.

Once you link the bank account, credit card, or debit card to the PayPal account, you can easily use it to make payments for your purchases. The service facilitates the transaction between the bank and the merchant to secure your financial information.

PayPal can also send and receive money to and from others. Any money received through this method sits in the PayPal account until it is used to pay for something.

Why Use PayPal?

Though several online payment systems are available these days, PayPal offers some benefits that set it apart from others. Let us look at why PayPal makes the best choice for buyers and sellers.

Payment Protection

PayPal offers buyer protection to ensure shoppers get a refund if they experience trouble when buying products online. Such a feature is particularly useful when shopping on eBay as there is no guarantee on the platform.

Sellers can also stay protected when using PayPal to get paid. If a seller can prove that he has sent an item and the buyer does not acknowledge it, the seller can keep the payment.

Easy and Convenient

The fifth most widely accepted payment method alongside American Express, Mastercard, and Visa, PayPal is available at most stores on the internet. Even small retailers today offer this payment option for the convenience of shopping without credit cards.

You can find PayPal support on thousands of websites that don’t accept other digital payment services. It lets you make payments from your bank account without typing the card details; you need to save your PayPal login credentials.

Secure Transactions

When you pay using your credit or debit cards, your financial information can leak, risking your security. PayPal adds an extra layer of protection by ensuring that your sensitive data is never exposed. It also employs several other measures to keep accounts secure, including two-factor logins, end-to-end encryption, and email confirmation for transactions.

How to Use PayPal?

To start using PayPal to send or receive money, you can opt for one of the two types of accounts it offers – Personal and Business. Both these accounts provide a wide variety of uses and benefits.

Personal Account

A personal PayPal account is common for individual use. This account lets you send and receive money and make online purchases. You can also add credit cards and bank accounts and access your purchase history with a personal account.

Business Account

PayPal also lets businesses accept payments from customers via PayPal and other methods for customers who don’t use PayPal.

A business account can be set up by providing details like the name and address of the company, customer support contact, and banking information. Professionals and service providers can also use this account to accept online payments and send invoices.

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Creating a PayPal Account

Registering for a PayPal account is quite simple. You can either go to PayPal.com from your desktop or mobile browser or use the mobile application to create an account. Here are the steps you can follow:

  • Download the PayPal app on your Android or Apple phone or visit www.paypal.com
  • Locate the ‘Sign Up’ button and click on it
  • When asked to choose between Personal and Business accounts, select the type of account you want to create
  • Enter your contact number to receive a security code for confirmation
  • Provide details like password, email address, and name
  • Next, you are asked to give your mailing address and agree to the privacy policy
  • Once you do this, your PayPal account is created
  • You can then add your financial details to the account, including credit and debit cards as well as bank account

Sending Money Via PayPal

There are many ways to send money through PayPal. The exact method you use depends on the use and preferences. Below, we look at some of the most popular applications of PayPal.

How to Send Money to Friends and Family

Whether you want to send some cash to your family members or wish to pay your share of the rent to your roommate, here is how you can use PayPal in simple steps.

  • Open your online PayPal account or mobile app and click on the ‘Send’ button on the home screen.
  • Then, enter the name, phone number, and email address of the person you want to send money to. It also allows scanning the receiver’s PayPal QR code.
  • Type the amount you wish to send, followed by any additional information like a personal message for the receiver about the payment.
  • PayPal will then ask you whether the payment is for “Goods and Services” or “Friends and Family”. Ensure that you choose the right option and proceed.

How to Pay for Products and Services

You may want to send money for services or products via PayPal in several situations. You might want to purchase something from a vendor at a market or pay a serviceman you just hired. If the recipient has a PayPal account, money can be sent in a few simple steps.

  • Click on the ‘Scan/Pay’ button on the app if the receiver has a QR code.
  • Alternatively, use the ‘Send’ button on your app or online PayPal account. Type the name, contact number, and email address of the person you want to pay.
  • Next, enter the amount with an optional note suggesting what the payment is for.
  • In the final step, PayPal asks whether you want to send money for “Goods and Services” or to “Friends and Family”. Select the option and continue to pay.

Getting Paid via PayPal

PayPal also facilitates receiving payments from clients and customers, friends, and families. However, you should remember that some transactions can attract charges which is why you should ensure that you select the most suitable option for your requirement.

  • Go to your PayPal account or mobile app and click on the ‘Request’ button.
  • You have multiple options to choose from:
    • Enter the mobile number or email of the person you want to receive money from
    • Split a bill
    • Generate a PayPal.Me link for sharing
    • Create an invoice
  • The sender can initiate a payment by entering your email address or mobile number.
  • Whenever somebody sends you a payment via PayPal, you are notified through the app and email, and the amount gets deposited into your PayPal account.
  • You can either use the money for payments or withdraw it to your bank account.

Does PayPal Charge a Fee?

PayPal allows you to create an account for free. Making online payments and sending and receiving money do not cost anything. However, PayPal does charge a fee for certain transactions.


When you pay retailers and websites for products you want to purchase, PayPal does not charge anything if it requires no currency conversion. When you purchase in a foreign currency, you can expect to pay a 3-4% transaction fee.

Personal Transactions

When you use PayPal to send or receive money to and from friends, family, and relatives, it is classified as a personal transaction. PayPal offers you a unique ‘Friends and Family’ option to make personal transactions. These payments are sometimes free and incur charges at some other times, depending on where you are sending money and where you are drawing it.

For example, if you use a credit or debit card to send money, you pay a 2.9% charge for domestic transactions and 5% for international payments, and a fixed charge that varies for different countries.

On the other hand, using your PayPal balance, bank account, or Amex Send account will not attract any charges for personal transactions if they are domestic. For international transactions, you pay a 5% fee. Receiving money via PayPal from a friend is free if no currency conversion is involved in the transaction.


Though PayPal lets you transfer your account balance to a bank account for free, it involves some waiting time. If you want an instant transfer, you pay a charge of 1% when withdrawing your balance to a local account. Moreover, drawing a check from the PayPal account incurs a fee of $1.5 per withdrawal.

Final Thoughts

Regardless of the application, whether using it for personal money transfer or online shopping or as a payment option for your eCommerce store, PayPal is one of the safest and the most convenient ways to send and receive money over the internet.

We hope this guide gives you some idea about the working of PayPal and makes it easy to get started with this service for personal or business needs.

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