How Does PayPal Work?

PayPal is one of the most popular online payments platforms around. Since 1998, PayPal has been at the forefront of sending and receiving payments over the internet.

With an active user base in the hundreds of millions, it’s hard to overstate the importance of PayPal for both consumers and businesses alike.


We’ve all heard of PayPal, but how exactly does the platform work, and what services are available?

Key Takeaways

  • PayPal operates as an online payment platform that allows users to send and receive money, and make purchases without having to share sensitive financial details directly with merchants. It links to users’ bank accounts, credit cards, or debit cards for funding transactions.
  • The platform is versatile, providing both personal and business accounts, which offer different features suited to individual spending, sending, and receiving needs, as well as for business operations like accepting payments and managing invoicing.
  • PayPal is widely recognized for its security measures, including two-factor authentication and purchase protection, which safeguards users’ transactions and personal information, making it a trusted choice for online financial interactions globally.

What is PayPal?

PayPal is an online financial service and payment platform. At its heart, PayPal enables individuals and businesses to send and receive money more securely. Because PayPal is linked to your bank account, credit card or debit card, users don’t have to reveal sensitive financial information to a merchant when making payments.

PayPal provides a secure internet account that can be accessed via browser, the mobile app, or even in-person.

PayPal Holdings, Inc. is based in San Jose, CA and also owns other finance platforms such as Venmo and Braintree. It’s an international company that provides payment services to millions worldwide, and also allows for cheaper global money transfers.

With PayPal, users can also access other services such as a PayPal credit or debit card.

How does PayPal work?

PayPal is essentially an intermediary between you and your bank account. Users can link their bank account and credit or debit card to their PayPal account.

When making payments online, they then have the choice of conducting the transaction through PayPal or directly through their bank. Making an online purchase through PayPal means you can avoid having to enter in your personal and banking information. 

PayPal allows users to make and request payments online quickly and easily. You can sign up for a PayPal account for free.

Online Purchases

While you can receive payments via PayPal just by providing your basic personal information, to use PayPal for shopping online you’ll have to provide details of a bank account, credit or debit card.

Some people choose to link their card or bank account, some people like to do both. Either way, once you’ve done that, the company will then verify your information to ensure there is no identity fraud taking place. Once you’re confirmed, your acc ount is ready to go.

Merchants who accept PayPal payments will display the PayPal logo on their website. Using PayPal at the checkout is simple:

  • Click the PayPal button at the checkout.
  • Follow the prompt to log into your PayPal account and confirm payment.
  • Once confirmed, you’ll be returned to the merchant to complete the transaction.
  • The payment will be deducted from your PayPal balance or bank account.

Send & Receive Money

PayPal is one of the easiest ways to send and receive money online. Once your PayPal account is linked to a bank account, you can send money directly to another PayPal user.

There is no charge for sending money to another user if the funds are coming from your bank account or PayPal account. However, if you want to send money abroad, keep in mind that there are currency conversion fees.

Sending money via PayPal is straightforward:

  • Log into your PayPal account.
  • Ensure your account is linked to a bank account, debit or credit card.
  • Navigate to the “Send and Request Money” menu.
  • Enter your recipient’s email address or PayPal username, and follow the prompts to confirm the payment.

When it comes to receiving money from friends, family or even for business purposes, all the sender needs is the email address you used to sign up with PayPal. Alternatively, you could request money from them using their email address.

You will be immediately notified via email once the sender makes a payment.

With money in your PayPal wallet, you can then either transfer these funds to your bank account or use your PayPal balance to make transfers and purchases online.

How to Create a PayPal Account

Creating a PayPal account is free and straightforward. To be fully set up, you’ll simply need to provide and verify personal and banking information. PayPal offers both personal and business accounts, so we’ll take a look at the setup process for both below.

Personal PayPal Account

This account type is best suited to those interested in online shopping. It’s also good for those who want to send and receive money among friends and family. PayPal’s personal account is the standard.

Here’s how to set up a PayPal personal account:

  1. Click ‘Sign-Up’ on PayPal’s website and choose Personal Account.
  2. You will then be asked for details including your country, name, email address and phone number. 
  3. Click ‘Continue’ to finish creating your account.
  4. You will then verify your account via email.
  5. You can also choose to set up verification via phone, for added security.

Once you’ve got the basic setup process complete, you can then choose to have a credit card, debit card or bank account linked to your PayPal account. Simply provide your bank account information, or credit or debit card details.

You will also need to complete an ID verification process to have a linked bank account.

Once you’ve done that, you can begin using PayPal to spend, send, and receive money.

Business PayPal Account

Setting up a PayPal business account is pretty simple, although obviously more involved than setting up a personal account. PayPal Business allows business owners to accept card payments, as well as offer one-click checkout options for customers.

 Set up an account by following these steps:

  1. Click ‘Sign-Up’ on PayPal’s website and choose Business Account.
  2. Enter a business email address, making sure the address isn’t already associated with a personal PayPal account. 
  3. Provide basic information on you and your business, and click through.
  4. You will then be asked for more detailed information about your business, such as keywords, monthly sales and your website.
  5. After verifying your account via email, the next step will be to log in to PayPal again and follow the prompts to input your business bank account details. 

If you would like to know more about PayPal for business, and the services offered, check out the relevant section below.

What are PayPal fees?

While it costs nothing to set up an account, there are certain PayPal charges and fees associated with some transactions. The exact fee you’ll be charged depends on the nature of the transaction, your location, and the method of payment you choose.

There are no fees for making online purchases with retailers that accept PayPal, as long as there is no currency conversion involved. There are also no fees involved when sending or receiving money between family or friends in the same currency.

Some of the transactions that carry fees are outlined below:

Instant Withdrawal Fees

Withdrawing money from your PayPal account will cost you nothing. The downside is that these bank transfers usually take two to three business days to process. PayPal thus offers the option of instant bank withdrawal, with a 1% fee attached.

You may also draw a check from your PayPal balance, with a fee of $1.50 per check.

International Transaction Fees

PayPal is a global platform, and makes some of its profits from foreign transaction fees. If you are using PayPal internationally, expect to encounter some form of international fee for the transactions you make.

There are two different payment methods offered by PayPal for international money transfers. With the first, sending funds directly to another PayPal account will cost 5% of the total transaction. This fee structure is maximized at $4.99 with a minimum fee of $0.99.

On the other hand, for an international transfer conducted with a debit or credit card, or through PayPal Credit, the fees differ. In such cases, there is a funding fee of 2.9% in addition to a fixed fee depending on the currency.

Currency Conversion Fee

If you use PayPal to conduct an international payment that involves converting currency, you will incur a fee for the service. You may also choose to use PayPal to transfer money to another currency. PayPal’s currency conversion fee is either 3% or 4% depending on the transaction.

PayPal for Business

PayPal accounts for business provide the same basic online payment functions as personal accounts. However, there are many additional services and perks that make business easier for merchants.

Let’s take a look at some products and services that PayPal for Business offers.

Payment Services

PayPal offers multiple payment methods for business, with a robust online payment system:

  • Debit and credit card payments
  • Venmo
  • PayPal checkout
  • PayPal Credit

Business Debit Card

PayPal’s Business Debit Card is provided by Mastercard. It comes with a standard cashback rate of 1% on eligible purchases, and has a daily spending limit of $3,000.

PayPal Shipping

PayPal offers business accounts a free shipping service, with discounts on shipping labels with UPS and USPS. These labels can be purchased, printed, and tracked directly through your PayPal account. This shipping service will also automatically save your tracking number for PayPal Seller Protection.

PayPal Invoicing

PayPal Invoicing is another extremely useful and completely free service. Custom invoices can quickly be created and sent via email or link.

You can also view billing history and monitor payments, as well as accept partial payments with PayPal Invoicing.

PayPal Business Loans

PayPal offers business accounts two different loan products designed for growing small businesses. The first of these is their standard business loan. According to PayPal, this loan is best suited to companies who have been operating for at least nine months, with a minimum of $33,300 in annual revenue.

You can check your eligibility online or over the phone, just keep in mind that it may involve a hard inquiry, which will have a slightly negative effect on your credit score.

Here are a few things to know about the PayPal Business Loan:

  • There are never any late fees or other hidden fees.
  • Average terms range from 17 to 52 weeks, based on eligibility.
  • Funding amounts can range from $5,000 to $100,000 for first time borrowers.
  • Weekly fixed payments.
  • Funding as fast as one business day.

PayPal Working Capital

PayPal’s other business loan product is called Working Capital. Loan amounts are based on your account activity. For example, your account must be at least 90 days old with $15,000 processed in transactions within the past year.

Loan amounts are ultimately based on your sales, as payments are withdrawn directly from your sales. Loan amounts can be funded within minutes once you are approved.

Some further details on PayPal’s Working Capital business loans:

  • There are no late, periodic interest charges or other hidden fees.
  • Loan amounts from $1,000 to $150,000.
  • Loan amounts and loan terms vary based on your sales.

With a sales-based loan, the higher your sales are, the faster you will be able to pay the loan off. Keep in mind, however, minimum repayments of 5-10% must be every 90 days.

Benefits of PayPal

PayPal is one of the most popular providers of online payment services today. Below, we take a broad look at some major benefits of using PayPal, for both consumers and merchants.

Free & Easy to Use

One of the primary reasons PayPal has become so popular is because the platform is clean, simple and easy to use. It also costs nothing to set up an account. With PayPal, sending and receiving money is seamless, making online payments much easier and faster.

Safety and Security

PayPal offers consumers purchase protection, as well as strong encryption on personal data. Using PayPal to process payments means you don’t need to worry about your information being vulnerable.

PayPal also offers two-factor authentication, as well as periodic confirmations for account logins and certain transactions. These details all add extra layers of security for users.

Fast-Tracked Sales

PayPal can help businesses pull in more revenue by making the checkout process faster and more convenient for customers. In a world driven by convenience and quick service, allowing customers the chance to bypass those tedious steps before the checkout can be a big plus.

Global Business

For consumers and business owners, a PayPal account allows access to a global market. With service in more than 200 regions around the world, PayPal makes paying people in their primary currency easier than ever.


Since its establishment in 1998, PayPal has become one of the world’s most accepted payment option. PayPal makes spending, sending and receiving money extremely convenient with payment options including PayPal Credit, debit and credit cards, both online and in-person.

PayPal can even be used to withdraw instant cash from an ATM (additional fees apply).

Loans & Credit

Another benefit of using PayPal is the chance for businesses to access loans and capital. PayPal offers two loan types as well as business credit options. 

PayPal Alternatives

If you’re unsure about whether a PayPal account is right for you, it will be helpful to look at some alternatives. There are several popular payment services providing similar services to PayPal.

Let’s take a look at three major alternatives.


Skrill focuses on allowing users to send money securely and easily. They also offer products like the Skrill Visa Prepaid Card. Skrill fees are competitive when compared to PayPal, and opening an account with them won’t cost you anything.

If your account is not used at least once every 12 months, however, you will be charged a $5 inactivity fee. 


Payoneer is another popular payment platform. This is another suitable option, especially for international payments. Payoneer is active in over 150 countries and allows users to easily transfer money to international currencies.

Payoneer transfer fees are not fixed, however, so be sure to check to avoid a surprise when sending money abroad.


Stripe is a detailed payments platform, and is especially popular among business owners. They offer a high level of integrations designed to facilitate small businesses. Because Stripe is designed with developers in mind, the user interface is a bit more complex compared to PayPal and other competitors.

On the other hand, this means Stripe is a useful option for businesses wanting highly tailored payment processing.

While PayPal fees and services are comparable, Stripe definitely appeals to merchants looking for a highly customizable payment processor.

Frequently Asked Questions

Is PayPal Safe to Use?

Yes, as an online payment platform, PayPal is safe. It uses end-to-end encryption to protect personal information, and also allows for additional security via two-factor-authentication.

You don’t need to worry about connecting your bank account or credit card to PayPal, but as always do make sure to practice good online safety habits. For example, always keep your PayPal login information as safe as you would keep the information for your checking account.

Does PayPal offer purchase protection?

Yes. PayPal customers can purchase protection on all eligible purchases where PayPal is used, as well as payments made through their website. The major caveat is that any dispute should be reported to PayPal within 180 days of purchase.

PayPal gives several examples of what and what is not covered by their purchase protection policy on their website.

What are the benefits of PayPal credit?

If you’re a business owner who might want to use PayPal credit, here are some of the primary benefits:

  • PayPal Credit provides your business with an immediate boost in purchasing power.
  • You can potentially avoid interest payments as long as your balances are paid within 6 months.
  • Sending money is cheaper through PayPal Credit, with standard fees of 2.9% + $0.30/transaction, up to 3.49% + $0.49.
  • Competitive fee structure with no annual fees and no maintenance fees.

What are the differences between PayPal Business and Personal Accounts?

A PayPal business account is designed to support several core business functions for small business owners. A merchant account is useful for any business owner regularly interacting with a large client base, or those operating with customers using different currencies.

For anyone else, a personal free account will be the right fit.

Should I use a personal or business account with PayPal?

Unless you are a small business owner, or a freelancer, with a large client base handling multiple currencies, you probably don’t need a PayPal business account.

Is there a minimum PayPal account balance requirement?

There are no maintenance fees or minimum balance requirements for PayPal accounts.

Does PayPal do currency conversion?

Yes. PayPal charges a conversion fee between 3% and 4%, depending on the details of your transaction.

Should I use the PayPal app?

The PayPal app can make it easier to send and spend money easier, but you can access the same services via the website. The PayPal app simply makes it more convenient to access your account and make payments on the go, and really turns the platform into a digital wallet.

Steven Brennan
Meet the author

Steven Brennan is a freelance writer specializing in finance and cryptocurrency. He has an MA in Literature from Maynooth University in Ireland, and lives in the Pacific Northwest with his wife and young daughter.