Learn How PayPal Works and Its Features

What PayPal Is and How It Started

PayPal is a financial services company that allows people and businesses to send and receive money online. Founded in 1998, PayPal merged with X.com, another online payment company, in 2000. Today, PayPal operates in over 200 countries and territories, serving hundreds of millions of users worldwide. The company processes billions of dollars in transactions each year, making it one of the largest digital payment platforms globally.

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The main purpose of PayPal is to provide a safer, faster way to move money compared to traditional methods like checks or wire transfers. Instead of sharing sensitive banking information with every merchant or person you pay, you share information only with PayPal. This adds a layer of protection to your financial data. When you make a purchase through PayPal, the seller sees your PayPal account but not your actual bank account or credit card details.

PayPal operates by acting as an intermediary between buyers and sellers. When you link a bank account, credit card, or debit card to PayPal, you create a digital wallet. This wallet holds your payment methods and allows you to send money to others who also have PayPal accounts. The company makes money through fees charged to businesses and merchants who use their payment processing services, not from individual users in most cases.

The company is publicly traded on the NASDAQ stock exchange under the ticker symbol PYPL. PayPal is owned by its shareholders and is regulated by various financial authorities depending on which country you operate in. In the United States, PayPal is regulated by the U.S. Department of the Treasury's Financial Crimes Enforcement Network and state money transmitter laws.

Practical Takeaway: PayPal functions as a middleman that keeps your banking information private while allowing you to pay for goods, services, and send money to people online. Understanding that PayPal doesn't store your actual bank details—it only stores your permission to access them—helps explain why using PayPal is considered safer than entering your banking information directly on unfamiliar websites.

Setting Up Your PayPal Account

Creating a PayPal account begins with visiting the PayPal website or mobile app and selecting "Sign Up." You'll choose between a Personal account or a Business account. A Personal account is designed for individual users who want to buy items online and send money to friends and family. A Business account is meant for people who sell products or services and need to receive payments from customers. Most individuals start with a Personal account, though you can change this later if needed.

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To create an account, you'll need an email address and a password. PayPal will ask you for basic information including your name, address, and phone number. This information helps PayPal verify your identity and comply with financial regulations. You don't need to provide payment methods immediately—you can add them after your account is set up. However, you will need to link at least one payment method before you can send money or make most purchases.

After creating your account, you can link a bank account, debit card, or credit card. To link a bank account, you'll provide your bank's routing number and your account number. PayPal will then make two small deposits (usually under $1 each) to that bank account. You'll need to confirm these amounts by entering them back into PayPal, which verifies that you own the account. This process typically takes three to five business days.

Linking a debit or credit card is faster. You provide the card number, expiration date, and security code. PayPal may make a small charge to verify the card, which you'll then confirm. Some users link multiple payment methods so they can choose which one to use for different transactions. You can also set a primary payment method that PayPal uses by default when you make purchases.

PayPal requires you to verify your identity through additional steps in some cases. If you plan to send large amounts of money or receive significant payments, PayPal may ask you to confirm your identity with a government-issued ID or other documentation. This verification process is part of Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations that financial companies must follow.

Practical Takeaway: Setting up a PayPal account takes about 10 minutes, but verifying a bank account takes a few extra days. Start by adding your email and creating a password, then link a payment method. If you're in a hurry, link a debit or credit card instead of a bank account, since card verification happens much faster than bank account verification.

Sending and Receiving Money

One of PayPal's core features is the ability to send money to other people. If both people have PayPal accounts, sending money is straightforward. You log into your account, click "Send & Request," and enter the recipient's email address or phone number. You then enter the amount you want to send and choose which payment method to use (your bank account, debit card, credit card, or PayPal balance). PayPal charges no fee for sending money to friends and family within the United States if you use a bank account or PayPal balance. However, if you use a credit card to send money, PayPal charges a percentage fee, typically around 2.2% plus $0.30 per transaction.

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When you send money, it reaches the recipient almost immediately if they have a PayPal account. The money goes into their PayPal account balance. They can then transfer it to their own bank account, keep it in PayPal, or use it to make purchases. Transferring from PayPal to a bank account usually takes one to three business days, though PayPal offers an instant transfer option for an additional fee of 1% (with a minimum of $0.25 and maximum of $25 per transfer).

Receiving money through PayPal works in reverse. When someone sends you money, it arrives in your PayPal account. You can see the transaction in your activity history with details about who sent it and when. You're not charged a fee for receiving money from friends and family within the United States. However, if someone sends you money as a business payment, PayPal charges the receiver a fee. This business payment fee is typically 2.2% plus $0.30 for domestic transactions.

PayPal also offers a "Request Money" feature where you can ask someone to send you payment. You provide the recipient's email address, the amount, and an optional description of what the money is for. The recipient receives a notification and can choose to pay or decline. This feature is useful for splitting rent, dividing restaurant bills, or collecting money for group gifts.

For international transfers, PayPal allows you to send money to people in other countries. These transactions typically involve currency exchange and higher fees than domestic transfers. The exchange rate PayPal uses may be different from the current market rate. International transfers also take longer to complete, sometimes several business days depending on the destination country and that country's banking system.

Practical Takeaway: Sending money to friends and family through PayPal is free if you use your bank account or PayPal balance, but costs money if you use a credit card. When receiving money, there's no fee for personal transfers but there is a fee for business payments. Always check which type of transfer you're making before you proceed to understand any fees involved.

Using PayPal to Shop Online

PayPal's most common use for many people is making online purchases. When you shop at a website or app that accepts PayPal, you'll typically see a PayPal payment button at checkout. Clicking this button takes you to PayPal's secure login page where you enter your email and password. PayPal then shows you the transaction details—the amount, the merchant's name, and what you're buying. You review this information and click to confirm the payment. The merchant receives confirmation that you've paid, and you're returned to the retailer's website to complete your purchase.

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This process protects your payment information because you never enter your card or bank details directly into the merchant's website. Instead, you share your PayPal login with PayPal's secure servers only. PayPal then tells the merchant that payment was made without revealing your actual payment method. Millions of retailers now accept PayPal, including Amazon, eBay, Walmart, Best Buy, and countless smaller online stores.

PayPal offers a "one-click checkout" feature on many websites. If you've used PayPal on a particular site before, you can check out using PayPal without logging in again each time. Your payment