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How does PayPal Work

How does PayPal Work

Do you want to know how to make safe online transactions? Learn how PayPal works, which is a trusted organization operating worldwide, that makes financial transactions on the Internet extremely simple.
Tulika Nair
Last Updated: Jun 3, 2018
In order to understand how PayPal works, it is important to know what it actually is. An e-commerce business, it allows users to make payments and conduct money transfers over the Internet. It is a technological advancement on the age-old money transaction methods of checks and money orders.

So, how does PayPal work? Well, in a nutshell, what it does is, it creates an account for a user, which is linked to either a bank account or a credit card account from which the debit for the online transaction happens. The person who receives this money can either receive it in his own PayPal account, get a check from the company, or get it transferred to their bank accounts. PayPal charges a fee for the transaction it performs, depending on the currency used, the country of the purchaser/sender and the seller/recipient, the amount that is transacted, and also the account type. In simple terms, PayPal is a middleman service that enables e-commerce all over the world.

PayPal: An Overview

PayPal was formed in the year 2000 in Palo Alto, California, as a collaboration of a financial services company and a Palm Pilot payments and cryptography company, Confinity. Together, they created the online payment system PayPal. In the meantime, eBay realizing the growing importance of online transactions and necessity of online payments, bought Billpoint and made it the official payment system, allowing it to be used only for auctions on eBay. This was the reason that PayPal caught on more widely. In 2002, when eBay realized that more than fifty percent of eBay users preferred PayPal as their method of payment, they bought it for USD 1.5 billion. One of the earlier queries that most people posed was how do these companies work together? Initially, eBay required everyone on its Australian and United Kingdom sites to use PayPal, allowing them no other payment option. However, they changed this stance soon, making PayPal one of the payment methods in Australia. Today, it is operated in almost 190 markets and allows its users to make transactions in 19 different currencies. It has local offices in 13 countries.

How does it Work?

In order to make transactions using PayPal, you need to first set up an account. Just use a valid email id to set up the account and follow the instructions that are given on the site once you click on Sign up. There are different account types that you can opt for, which include accounts for business and personal use. Once you have opened an account, you can make any transactions you want to. In order to make a purchase using PayPal, all you need to do is select the option on the website you are making the payment on. Choose the account from which the funds need to be debited and then the transaction will be conducted securely from your account into the vendor's account. This is the simplest explanation to the question, how does PayPal work. If you want to know how does eBay work with it, the process is the same; you select the payment option as PayPal for eBay auctions.

The reason for the popularity of PayPal is simple. It saves a lot of time. It also allows you to save all data about your financial transactions in one place, so that you do not have to hunt around every time you make a transaction. It is faster than conventional forms of money transfer. Being a worldwide organization, it is acknowledged by almost all international merchant websites. It is also safe, as it protects the information you provide, never allowing a third party access to the data and it also employs a team to prevent any financial fraud.

So, now that you know what is PayPal and how it works, you can sign up for your own account to make financial transactions. Understanding how it works is very important, as you need to have all information possible to protect yourself from any kind of financial fraud. Understanding the system will allow you knowledge of how safe the financial transaction system is.