What Is PayPal, And What Are The Pros And Cons?

PayPal is an online payments company that allows its users to easily send money to friends, family, business associates and more. Founded in 1998, PayPal is one of the original web payment companies and was purchased by eBay in 2002. In 2015, PayPal spun off from eBay and today remains a separate, publicly traded company. PayPal is free to set up and easy to link to a bank account, debit card or credit card to transfer money to others.

What Is PayPal?

The PayPal website and app allow people to send payments to retailers or to each other online. In order to send and transfer money via PayPal, you’ll need to set up an account. Setting up an account with PayPal is free and only requires an email address and some basic information.

Once you have a PayPal account, you can both send and receive money from anyone else with a PayPal account. If you want to transfer money to a friend who doesn’t have a PayPal account, they can always make an account for free. It’s free to send money to family and friends, though PayPal does charge a small processing fee to send money to retailers or as part of a business transaction.

More familiar with Venmo? PayPal actually acquired Venmo in 2013, another online peer-to-peer payment service. This means that regardless of whether you use PayPal or Venmo, your online payment is being processed by the same company.

PayPal Credit

PayPal Credit is a revolving credit line that you can access through your PayPal account. With PayPal Credit, you don’t have an actual physical credit card. Instead, you can use your PayPal Credit account anywhere that accepts PayPal. Like most credit cards, you’ll be charged interest and/or fees if you don’t pay your balance in full each month. You’ll be billed for PayPal Credit monthly, just like you would with a regular credit card.

Separately, Venmo does offer a physical card, the Venmo Mastercard, which can be used at any merchant that accepts Mastercard. That said, it works more like a debit card (tied to your Venmo balance) than a traditional credit card. This makes it convenient to use your Venmo balance at more traditional merchants and in person.

PayPal Cash

PayPal Cash is the account that holds your PayPal balance, introduced as a feature in 2019.

When someone sends you money via PayPal, you can choose whether to transfer it to your own external bank account or keep it in your PayPal Cash account. You can use any money that you have in your PayPal Cash account to send to family and friends or to make purchases in some cases, without having to connect to an external bank account. You can also use your cash balance to pay via Google Pay or Samsung Pay.

How Does PayPal Work?

PayPal works as a service platform to facilitate transactions between two people (or businesses). If you’re looking to transfer money to friends and family, there is no charge. If you’re sending money as part of a purchase or payment for a service, PayPal will take a small processing fee out of the amount before passing the balance on to the recipient.

If you’re a business owner looking to accept PayPal as a form of payment, you’ll first need to create a PayPal Business account. While you can sell things with a personal PayPal account, if you’re a business owner looking to streamline operations, a PayPal Business account may make more sense. Both types of PayPal accounts offer fraud protection, enhanced security and encryption for all transactions.

PayPal Pros And Cons

Here are some PayPal pros and cons to keep in mind:

Pros

• PayPal is easy to use – it’s a very straightforward way to send money to friends, family and businesses.
• Using PayPal gives you an extra level of security and fraud prevention. If you pay for a purchase using PayPal that ends up being fraudulent, PayPal can help get your money back.
• PayPal encrypts your bank and credit card information, keeping that information safe.
• There are no fees for sending money to friends and family.

Cons

• While it is free to use PayPal to send money to friends and family, you’ll be charged a fee for any business transactions.
• PayPal also charges a 1% fee if you want instant access to your money, while a free bank transfer takes several days.
• PayPal has a reputation for being aggressive with account freezes, for reasons ranging from a sudden increase in transaction volume to violating PayPal’s user agreement. If PayPal does freeze your account, they can hold your PayPal balance until you can prove that you have done nothing wrong.
• All charges paid for through PayPal will show up as PayPal on your credit bill. This can make it difficult to manage subscriptions, though you can always recategorize those transactions using the Rocket Money app to help keep track of your spending.

PayPal Alternatives

In addition to Venmo (a subsidiary of PayPal, as discussed above), there are a couple of other payment services that operate in a similar niche to PayPal. Here are a few that you might want to be aware of:

Apple Pay

Apple Pay is a system for sending and accepting payments backed by Apple, and integrated tightly into its iPhone app. With Apple Pay, you can make contactless, secure purchases anywhere that accepts Apple Pay at checkout. You can decide in the mobile app to draw money from your bank account, debit card or credit card.

Google Pay

Google Pay is a payment network backed by Google. With Google Pay, you can store your credit card or payment information inside your Google Wallet. Then, you can use your bank card, debit card or credit card to pay merchants anywhere that Google Pay is accepted.

Skrill

Skrill has some similarities to PayPal, in that you can store your payment information with the service, and then use that to pay other people. While receiving money on Skrill is free, Skrill charges to send money, usually as a percentage based on the type of transaction. If you withdraw your money by transferring it to a bank account, there are no additional fees.

Zelle

Zelle is another online payment service used to transfer money between people by linking directly to most major bank accounts. Like PayPal, Zelle does not charge a fee for payments made between users. Further, money is usually available within minutes, though it can take up to 3 days depending on the transfer.

The Bottom Line

PayPal is one of the largest processors of online and peer-to-peer payments. It is accepted for checkout on many sites around the internet and is becoming more commonly accepted at brick-and-mortar establishments.

Looking to improve your money management skills? Sign up for the Rocket Money app^SM for more transparency in your spending.