What Is PayPal?

Definition and Examples of How to Use PayPal

Woman using credit card to shop online

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PayPal is a service that online shoppers and businesses of all sizes can use to make transactions easier and safer. It expedites online purchases, and it hides sensitive financial information from merchants.

Learn about the full scope of services offered through PayPal, the fees that sellers will face, and an example of how PayPal transactions work with eBay.

What Is PayPal?

PayPal is a digital payment service that customers can use while shopping online. PayPal stores payment info, such as bank account or credit card numbers, so that customers don't have to type out the numbers every time they buy something. PayPal also hides this financial information from businesses, adding a layer of security to online shopping. Small businesses and large corporations alike can incorporate PayPal payments into their online checkout process.

As a PayPal member, you can:

  • Transfer money to or from your bank account to your PayPal account
  • Get a cash advance from your credit card and deposit the amount in your PayPal account
  • Make person-to-person (P2P) payments by transferring money from your PayPal account to another
  • Have a check mailed to you for the balance of your PayPal account
  • Get a PayPal debit card that you can use to make real-world purchases from your PayPal account

PayPal is a service, but it's also a publicly-traded company with shares listed on the Nasdaq exchange. PayPal owns several other digital payment services, including Venmo, Braintree, and Xoom.

How PayPal Works

To use PayPal, both sellers and buyers must sign up for a PayPal account. This process will include linking a bank account or a credit card. It's a fairly quick process, and once it's set up, you're ready to use PayPal.

PayPal uses encryption to keep your financial information secure. It also offers fraud prevention, which seeks to recognize and block fraudulent charges, as well as purchase protection, which reimburses customers whose purchase never arrives in the mail.


PayPal is free for buyers—there aren't any fees associated with purchases. For sellers, the fee to use PayPal will depend on the location of the sale and whether the seller is a nonprofit or not.

U.S. sales are subject to a flat fee of $0.30 in addition to 2.9% of the sale. Eligible charities pay the same flat fee, but only 2.2% of the sale. The flat fee for international sales will depend on the currency, but they will all face a fee of 4.4% of the sale.

Brick-and-mortar retailers can use a PayPal card reader. A swiped card comes with a 2.7% fee. Manually entered payment information comes with a fee of 3.5% plus $0.15.

PayPal also allows users to send P2P payments. Those transactions are free as long as the funds come from a linked bank account. If the funds come from a linked credit or debit card, then there's a 2.9% fee plus a currency fee (for example, $0.30 for U.S. dollars).

How PayPal Works With eBay Transactions

Small businesses that operate on eBay will likely need to be familiar with PayPal. When a buyer wins an auction, has a best offer accepted, or purchases an item at full price, the seller will send an invoice to the buyer. If the buyer and seller both have PayPal, the transaction can be quickly completed through the service.

paypal transaction process
The Balance

After the buyer wins an auction or makes a purchase, they can select PayPal as the payment method at checkout. By checking out using PayPal, the winning buyer automatically triggers a transfer of funds from their preferred payment method (either credit card or bank account) into their PayPal account.

Once the buyer has funded the transaction, those funds are immediately transferred to the seller's PayPal account. If the buyer already has funds in their PayPal account, then PayPal can use those funds before drawing on a bank account or credit card.

The funds will land in the seller's account nearly instantaneously. Once the funds are there, the seller is free to transfer them to their bank account, have a check mailed from PayPal, or spend the money directly by buying something with PayPal.

Alternatives to PayPal

PayPal may be one of the most popular digital payment services, but it isn't the only option. Here are just a few examples of the alternatives.


PayPal, then a subsidiary of eBay, acquired Venmo's parent company Braintree in 2013. While it's technically owned by PayPal, Venmo specializes more in small P2P payments among friends and family. The Venmo app incorporates a feed, similar to the news feed found on social media sites, that allows friends to see your payments along with any comments you attached to them.

Cash App

Cash App started as a P2P payment service, similar to Venmo. However, while Venmo incorporates aspects of social media, Cash App trends closer to traditional banking services. There isn't a social feed, but in addition to P2P transactions, Cash App users can set up direct deposits, get a debit card, and buy stocks or Bitcoin.

Apple Pay

Apple users can use Apple Pay to process digital payments to friends, family, and merchants. This service can be linked to bank accounts, as well as credit and debit cards. The app can be used with an iPhone or Apple Watch to make purchases at any store with a contactless card reader. P2P payments can be made through text messages or by asking Siri to send money to one of your contacts. Apple Pay is also compatible with many apps and websites.

Google Pay

Google Pay is Apple Pay for Android users. Users link a bank account, debit card, or credit card (or all three). Google Pay allows users to make purchases at a store or online. You can also send P2P payments, as long as you're in either the U.S. or India. There was once an Android Pay app, but that was combined with Google Wallet to create the Google Pay app. Unlike Apple Pay, you don't have to be an Android user to use Google Pay—iPhone users can download the app, as well.

Key Takeaways

  • PayPal is a digital payment service.
  • Businesses of all sizes can use PayPal.
  • PayPal's other services include P2P payments and debit card accounts.
  • PayPal is a publicly-traded company that also owns services like Venmo.