How Do Paypal Payments Work?

By Angela Powell Watson

Overview

PayPal Basics

PayPal is one of the world's most popular online payment methods, with more than 100 million accounts. Through PayPal, any individual or business with an email address can transfer money online. PayPal can be used to make monetary donations, purchase goods or services through online merchants, or to pay for items won on auction sites such as eBay.

Infrastructure

Transferring money via PayPal provides additional security because PayPal acts as the middleman between the sender and the recipient. Bank account or credit card information is provided directly to PayPal, rather than exchanged between a buyer and seller. All payments are made through PayPal's encrypted software to ensure an added layer of security. PayPal handles all interchange fees charged by banks and credit card companies when payments are sent, and makes the money back by deducting a small amount from money that it transfers into recipients' accounts.

Account Requirements

To use PayPal, a user must first set up a free account at www.PayPal.com. The user must enter a name, address, email address and phone number, then provide a login name, password, and the answers for two security questions. Adding credit card or bank account information is optional, but necessary if the user wants to make online purchases or transfer monies received into a checking or savings account. After signing up, the user will receive an email confirmation that outlines terms of use and explains the account verification process.

Sending and Receiving Funds

To send funds with PayPal, the user may log in to his account and click "Send Funds." PayPal will request the email address of the person receiving the money, and send a notification to the recipient that she has received a payment. If the recipient has a PayPal account, the money will be automatically deposited in the account; if not, the recipient will be prompted to open a PayPal account to access the funds.

Making Online Purchases

To pay online for goods or services via PayPal, the buyer must click on the payment option that reads "Pay online securely with PayPal" or other similar wording. The buyer will then be directed to a PayPal login page. After logging in, the buyer will confirm the payment amount, shipping address and other information relevant to the purchase. The funds are automatically deducted from the buyer's bank account or charged to his credit card, depending on the previously selected payment options. An email will be sent by PayPal to both the buyer and seller to confirm the transaction details.

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