What is PayPal and how does it work?

Adam Rozsa

Without a doubt, there is no online payment service more known than PayPal. The company has been around since 1998 with a simple concept: they store bank account and credit card information so that consumers can make secure online payments without revealing financial information to merchants.

Over time, PayPal added more features such as PayPal-linked credit, debit and cash cards, e-commerce business perks, and wire transfer services through Xoom. But what is PayPal, and how exactly does it work? In this article, we got you covered.

In the article, we'll also mention Wise, which can be a great PayPal alternative – check it out, you may save money, but more on this, later.

Learn more about Wise


📑 Table of Contents

What is PayPal?

Let’s start with the key question: what is PayPal all about?

PayPal is a financial technology company which offers online payment services to individuals and businesses.

Its core services revolve around electronic payments, by acting as an intermediary between people and businesses to let you send money to friends or shop securely online. PayPal operates across almost every country in the world, and has an astonishing 360 million+ active accounts.

Within the PayPal parent group there are also affiliated companies which offer a broad range of financial services like personal and business loans and credit.

Because a large part of PayPal’s business is powering ecommerce, the PayPal group also includes some companies which support online merchants and consumers, facilitating easier returns for online shopping and more.

What is PayPal credit?

PayPal credit is part of the PayPal group, primarily offering consumer financing for online shopping. If your purchase is eligible for PayPal credit, you may be able to split the cost of your bill, interest free, over 6 months.

However, as with any credit product, offers are subject to eligibility checks, and penalties and interest will apply if you don’t keep on top of payments.

How does PayPal work?

PayPal can offer you a personal account or one for your business — depending on what you need. In both cases, you’ll need to set up and verify your account before you can transact.

With a PayPal personal account, you can access the following key services:

PayPal’s advantages include security and convenience. Accounts are verified and secured — and you can make a payment using just the email address or mobile phone number of another PayPal user.

If an online store offers PayPal payments — most do as it’s widely accepted — you can complete a secure transaction through the merchant’s checkout cart — just look for the PayPal button on the site.

PayPal business accounts

As a merchant, you’ll need a PayPal business account, which offers a slightly different suite of services, including:

  • Accept payments online via website integrations
  • Accept payments in person
  • Make payments to suppliers and staff
  • Manage risk and detect fraud
  • Streamline business processes

PayPal business accounts also have different fees compared to personal accounts.

In both personal and business accounts, PayPal acts as an intermediary between a payer and a payee, so there is no need to exchange card or bank account information. This is to improve the security and privacy of a speedy transaction.

💡Not sure of which PayPal account fits your needs? Check out our comparison guide between PayPal Business and Personal accounts

How does PayPal payment work?

Once your account is set up, you’ll need to link it to a credit or debit card, or a bank account.

To make a payment to another PayPal account holder, you’ll then simply need to enter their email or phone number, and confirm the payment details.

Choose the payment method you want to use — your debit card for example — and PayPal can pull the money from your account and deposit it in the recipient’s PayPal account, often instantly.

How does PayPal work when receiving money?

When someone sends you a payment using PayPal, it’ll be deposited into your PayPal account automatically.

If you don’t have a PayPal account already, you’ll be sent an email or message with a link, asking you to create an account. Click on this to get your account set up and receive your PayPal payment.


Move money abroad in just a few clicks with Wise

Wise is an international a Money Service Business, working a little bit differently to other providers. By keeping local bank accounts in countries around the world, Wise cuts out all the expensive international fees that come with sending money overseas.

With Wise, you can:

  • Send and receive money abroad with transparent and small fees⁶
  • Hold and exchange money in 55+ currencies
  • Manage your money wherever you are with the Wise app
  • Get local bank details in over 10 currencies, including EUR and GBP
  • For a one time fee, get a debit card for your Wise Account which you can use at point of sales or ATMs all over the world
  • Get the mid-market exchange rate (the one you see on Google) for all your transactions

Get a Wise Account today

Please see the [Terms of Use](https://wise.com/terms-and-conditions) for your region or visit [Wise fees & pricing](https://wise.com/us/pricing/) for the most up-to-date information on pricing and fees.

What do you need to open a PayPal account?

To open a PayPal account, you’ll need to take the following steps¹:

  • Open the PayPal desktop site or app
  • Click sign up
  • Confirm if you want a personal or business account and tap get started
  • Follow the prompts to enter the information needed
  • Get verified and you’re done

The exact information needed will depend on the type of account you’re opening.

For personal accounts you’ll basically just need to enter your personal and contact information, but for business accounts you’ll also be asked to provide some details about your company.

To verify your account, you’ll then also need to link a bank account or card, and follow a verification step.

This may be as simple as logging into your online banking — or may require you to receive 2 small deposits and then enter the exact amounts into your PayPal account to prove you own the bank account in question.

💡Get a full step-by-step guide to opening a PayPal personal account or learn more about how to set up a PayPal business account, here.

How do you use PayPal?

Once your PayPal account is set up, you’re good to go. Here are some of the key ways you can use your PayPal account.

Personal accounts

With your PayPal personal account, you can receive money from anyone via your email address. Choose to either keep the money on your PayPal account, move it to your bank account, or use it for personal payments and spending on PayPal.

You can also send money online to anyone with a PayPal account using their email address, or you can shop online by selecting the PayPal logo at checkout. Payments will be deducted from your linked payment method or PayPal balance, depending on your preference.

PayPal also offers a bunch of extra personal account services, including options to have regular payments like salary added to your account through direct deposit. You can manage your money in the PayPal app, get linked cards for spending, and even invest.

Business accounts

PayPal business accounts are popular with online sellers, and people collecting funds through marketplaces sites — but you can also use them for offline sales, too.

Once your account is set up, your business has access to checkout services, a customer service email alias, and other business perks. But it’s important to be aware of the fees for your business².

PayPal business customers can also get financing and loans, make and receive payments and more.

💡Can you get scammed by using PayPal? Learn more on our full guide about PayPal scams

Do you have to pay for a PayPal account??

To answer the question, it depends on what you use PayPal for.

PayPal is free if³:

  • You’re making a purchase from an online store or a brick-and-mortar location
  • You want to send money to family and friends (personal account) in the US through a bank account, AmEx Send account or from your PayPal balance

PayPal charges fees if³:

💡 Check out our PayPal fee calculator, so you know how much each transaction will cost you.

Alternatives to PayPal

PayPal is great for sending money within the US, but you may want to consider these alternatives to send money abroad – let’s see what are your options.

Wise

Wise offers international transfers throughout the world with their online platform or highly rated mobile apps.

They use smart technology and their own payment network that skips the ‘international’ part of a transfer. This allows them to connect banks all across the globe.

What does that mean for you? It means that may save up money when you use Wise to send money internationally at the mid-market exchange rate.

Check out how Wise compares to PayPal below:

The true cost of sending USD to GBP

Skrill

A solid London-based alternative to PayPal is Skrill. They offer money transfers domestically and abroad in over 40 currencies — although you’ll want to check out the currency conversion fees which can be fairly steep⁴.

You can manage your accounts through their intuitive app and easily withdraw funds to linked accounts. They also offer a prepaid Visa card that’s very helpful when traveling.

💡Torn between PayPal and Skill? Our PayPal vs Skrill comparison guide can help you make your choice

Payoneer

Established in 2005, Payoneer has been a go-to service for e-commerce businesses for a while.

They also provide a special focus on freelancers, vacation rentals and digital marketing services by offering integrations with popular platforms in these industries.

Payoneer allows you to transfer funds in your Payoneer account to local currencies in over 150 countries, but be aware of their fees as they can vary depending on the source of the transfer⁵.

💡Not sure which one to choose between PayPal and Payoneer? Check out our PayPal vs Payoneer comparison guide.

PayPal is a huge global organization which offers a pretty impressive range of services for personal and business customers, with a focus on enabling secure and frictionless online payments.

Use this guide to learn more about what PayPal does, and how your PayPal account can work for you. And don’t forget to compare the services, features and benefits from PayPal against some popular competitors to make sure they’re right for your transaction.


Sources:
  1. PayPal - How to open an account
  2. PayPal - Merchant fees
  3. PayPal - Fees
  4. Skrill - Send and receive money
  5. Payoneer - Fees
  6. Please seeTerms of Use for your region or visit WiseFees & Pricing: only pay for what you use for the most up-to-date pricing and fee information

Sources checked on 3 February 2022


Please see terms of use and product availability for your region or visit Wise fees and pricing for the most up to date pricing and fee information.

This publication is provided for general information purposes and does not constitute legal, tax or other professional advice from Wise Payments Limited or its subsidiaries and its affiliates, and it is not intended as a substitute for obtaining advice from a financial advisor or any other professional.

We make no representations, warranties or guarantees, whether expressed or implied, that the content in the publication is accurate, complete or up to date.

Money without borders

Find out more

Tips, news and updates for your location