What is PayPal and How Does it Work?

What is PayPal

Paypal is an online payment service that has completely revolutionized the payments industry. Paypal, over the last decade, has been at the forefront of a digital transformation that has not only made online payments the new normal, but has also become one of the most preferred methods of payments. Now working remotely and freelancing is so much more accessible.

Paypal is one of the most sought after services that also enables you to make payments online. You can pay your friends and family or make payments to businesses for the services that you entail. Similarly, Paypal is also widely used by businesses to make payments to its freelancers and remote employees, who could be based out of a completely different corner of the world.

One of the most defining features of Paypal is that you can use Paypal to request a payment. This could be money you had lent a friend or a professional service you may have offered to a business. The money you receive from Paypal is credited to your Paypal account and can be transferred to your credit card or bank account. Funds in your Paypal account can also be used to make purchases on sites that accept Paypal as a preferred mode of payment.

Paypal is mostly free to use, when transferring money to your friends and family, as long as there is no conversion of currency. It does include a charge on currency conversions, or when you sell something on Ebay and collect money via Paypal. Paypal and Ebay have been associated for the longest time, as the internet auction company used to own Paypal. This was until it was spun off as a separately traded company in 2015.

While Paypal is great for the regular user, Paypal for business is also steadily growing in popularity. One of the newest introductions to Paypal for business, which is being lauded, is the functionality to accept card payments.

How does Paypal work?

Over the years, the online payments system has penetrated the global market and has garnered a large number of reach for itself. It’s adoption rate is massive. In face, it’s one of the most widely used payment systems on the internet, if not the most widely used.

One of the things that make Paypal popular on an auction/reselling site like Ebay is the buyer protection. So if you make a payment and do not receive your product, or it isn’t what it was promised, you get a refund. Similarly, this additional level of security helps the seller, so if the seller can prove he delivered the product, he can keep the payment.

Paypal also mitigates risk by not saving card details on e-commerce websites. So you don’t have to enter your cvv to make payments. Just your paypal credentials are enough.

To start using Paypal, the first step is to head to Paypal.com and click on the sign up button. You will be asked to select if you are a personal or a business account, post which you would have to add your banking information (account details and or credit card) for future transactions!

You can use Paypal to make purchases online, by looking for the Paypal icon on the website. Then, just follow the simple instructions that will enable you to quickly and securely complete the transaction for instore purchases. You can rely on the Paypal app, which is available on both Android and IOS operating systems.

What can you use Paypal for?

  • To make online purchases safely.
  • To transfer money to friends and family.
  • To sign up for a subscription. (Example: Using Paypal for video streaming services like Netflix.)
  • To make purchases in shops through the Paypal app. This is only possible with the app and in specific partnered shops that accept Paypal QR codes. What’s unique about the Paypal app is that it shows a list of all the shops and restaurants that accept Paypal payments, just by the virtue of their many strategic partnerships. You can also pay in advance for your order to not be stuck in the queue at a coffee shop. This way you have your coffee ready as soon as you get to the coffee shop.
  • Paypal Credit. Think of this as a virtual credit card where you can pay for items using your Paypal account, but pay for them later. Paypal levies a 17.9 percent interest per annum. However, on purchases exceeding an amount around the 100 Euro range, you get a 4 month interest free period to make the payment. If you pay the entire amount within these 4 months, you do not have to pay any interest.

Interest on Paypal credit, transaction fees on online purchases like with Ebay is how Paypal makes its money. Paypal also charges a fee for currency conversion and on GST. One glaring drawback with using Paypal is using it for international transactions and overseas purchases. Paypal is considered to be one of the more expensive payment processors when it comes to overseas transactions and purchases.

You are charged a whopping 5% for making online transactions. This if your transaction is funded by Paypal balance or your bank account. Should you choose to use your debit card, your credit or Paypal credit, an additional 2.5% transaction fee is levied on the entire transaction. What really makes Paypal super expensive with international transactions is that along with these charges, an additional currency conversion fee is levied on the entire transaction. Click here to find out how much you will receive or how much you would have to pay, while using Paypal to make international transactions.

See also: How to Setup A PayPal Account