How does PayPal work?

You may carry valuables such as cash, a debit card and multiple credit cards. But who wants to lug a bulky wallet or purse to the beach or a dance club or while doing adventure sports?

Now you don’t have to, with a digital wallet that could store all your financial information on your smartphone. You could buy things and send or receive money between friends and family—all online and on the go.

One of the most popular digital wallets is PayPal—used by over 360 million people in 200 countries with 25 currencies. 

Read on to learn exactly what PayPal is, how it works and more.

Key takeaways

• Digital wallets like PayPal are electronic versions of your physical wallet and allow you to pay for things without using physical cards or cash.
• With PayPal, you can send and receive money for personal or business purposes.
• Some PayPal services are free, but some cost a transaction fee.

PayPal is an online payment method that allows users to:

• Make purchases online and in stores
• Send and receive money for personal or business reasons 
• Store your money or transfer it to another account

Think of PayPal as the middleman between your money and who you want to give it to or get it from. You could link your PayPal account to your checking account, savings account, credit card or debit card.

Exchanging money with PayPal could eliminate the need to:

• Write a check
• Get a money order
• Pay for a wire transfer
• Use online bill pay
• Get cash from a bank or ATM

If you’ve ever bought anything online, you’ve probably seen the PayPal button as a payment option. You’ve probably also seen someone at a store holding their smartphone up to the payment terminal to pay from their digital wallet. 

Over 29 million retailers accept PayPal, which is the fifth most accepted payment option after Visa, Mastercard, American Express and Discover. Some brick-and-mortar retailers accept PayPal in stores via QR codes. 

PayPal can tap into your bank account or PayPal balance to pay retailers. In much the same way, PayPal lets you transfer money to others or receive it—even converting it into different currencies.

When it comes to the basics, most money transfer services work the same way—and typically don’t allow transactions outside their own network. That means you can’t use PayPal to send money to your friend’s Venmo or Zelle account.

You may be surprised to learn that many PayPal services are free, such as:

• Creating an account 
• Making online purchases 
• Sending and receiving money domestically from your PayPal balance or linked bank account
• Transferring your PayPal account balance to your bank account

But PayPal charges some transaction fees, such as:

• 1% fee for getting instant access to money someone sent you, plus $1.50 per withdrawal 
• 2.9% fee for using a debit or credit card to send money domestically
• 3%-4% foreign transaction fee for making online purchases that involve currency conversions from foreign retailers
• 5% fee for using a debit or credit card to send money internationally 
• 5% fee for using your PayPal balance or bank account for an international transaction

Retailers also could charge fees, so you might want to ask or read their website before using PayPal.

You may be wondering how it works in reverse. If someone wants to send you money, there are two ways you could start the process. 

They could initiate the payment by entering your email address or cellphone number. Or you could initiate the payment by clicking the request button.

For the latter, you could then choose one of four options:

• Enter the email address or cellphone number of the person paying you
• Create a PayPal.Me link to share
• Split a bill
• Create an invoice

Either way, when the money is deposited, you’ll receive a notification—either by email or through the PayPal app. Then you can decide whether to leave it there for future use or transfer it to your bank account.

For a business account, PayPal offers three ways for you to get paid. You could:

• Create, print and display a QR code
• Get a personal payment link to text or post on social media 
• Create an invoice on the app to text or email

Are you still trying to decide whether PayPal is right for you? Here are some more pros and cons you might want to consider.

PayPal has a number of benefits:

• Fast: PayPal instant transfers are immediate, so you don’t have to wait for your money to become available.
• Secure: PayPal hides your payment information from merchants—unlike when you hand your credit card to a retail store clerk.  PayPal uses end-to-end data encryption, lets you request email confirmation of transactions and lets you require two forms of verification, including facial or fingerprint recognition. PayPal also offers purchase protection in the form of:
  • Fraud prevention
  • 24/7 transaction monitoring
  • Dispute resolution
  • Refunds
• Easy and convenient: Unlike other online payment options, you don’t need to have your credit card handy or manually type in your credit card number, expiration date and three-digit security code. It’s all stored.
• Inexpensive: If you don’t have a bank account, PayPal’s prepaid card costs $4.95 monthly, which may be less expensive than check-cashing services.
• Rewarding: If you use PayPal often, you could consider a rewards-earning PayPal credit card or line of credit.
• Charitable: If you donate money to a qualifying charity through PayPal, the company waives the transaction fee.

Despite PayPal’s security measures, some people still aren’t comfortable making financial transactions online.

Online payment apps account for nearly 17% of the fraud reports the Federal Trade Commission receives from people who noted the payment method they used.

It is possible for scammers to rip you off. You could buy something that never arrives. Or they could buy something from you and make it look like they paid you but cancel the payment before it actually reaches your account. 

Someone could access your PayPal account if your smartphone is lost or stolen. 

Another potential problem is PayPal typically deducts a payment from your balance immediately. That could make it difficult—even impossible—to undo the transaction if you make a mistake or change your mind. It’s not like a bank that can stop payment on a check or a credit card charge you can dispute. 

And sometimes, you may not be able to spend your money immediately. You may have to wait one to three days for a standard transfer—even if the payment shows up in your PayPal account instantly.

Unlike a traditional bank, PayPal doesn’t offer full financial services—such as investment accounts, car loans or home mortgages.

If you’re ready to create a PayPal account, you’ll need a few things first: an internet connection, a smartphone or computer to access the app or website, an email account and a cellphone number.

Now, simply go to paypal.com or download the PayPal app on your smartphone and follow these steps:

• Click the blue sign-up button 
• Select “Get a Personal Account”
• Add your cellphone number to receive a security code for verification
• Enter the security code on the next screen
• Enter your name, email address and password
• Enter your mailing address
• Agree to the privacy policy

If you want to create a business account, the steps are a little different:

• Click the blue sign-up button 
• Select “Get a Business Account” 
• Enter your email address
• Create a login ID and password 
• Enter your business contact information  
• Click “Agree” after reading the user agreement, privacy policy and electronic communications delivery policy
• Enter your employer ID number or Social Security number 
• Enter your website address if you have one 
• Upon request, enter other personal information to verify your identity 
• Verify your information through an email you should receive

How do you usually like to pay for things? With PayPal, you can link your account to a bank account, credit card or debit card—or each of them.

Keep in mind that linking to a credit card might be more secure than linking to a debit card. With a credit card, you might not be held financially responsible for unauthorized charges. With a debit card, scammers could empty your account before you know it. 

With a credit card, you could also redeem rewards with PayPal when you buy something.

Whichever card or account you choose, the process can be pretty simple. After you’ve created your PayPal account, select the plus icon to add your card or bank account information. You could store multiple payment methods. Simply click on the wallet button to add another payment method.

PayPal will verify your card and billing address during the process.

Now, when you buy something, the checkout will default to your preferred card, but you could change the payment method each time. 

Do you need to pay your roommate for half the rent? Or repay a friend for picking up the check at lunch? Or send your nephew a cash gift for graduation? You could do it all over PayPal.

You might want to be cautious if you’re sending money to someone for the first time. To make sure you have the right person, you could ask them to send you a request from their app. Or you could send a small test amount before sending the actual amount.

Simply open PayPal, and follow these steps:

• If the recipient has a PayPal QR code, click “Scan/Pay” 
• If they don’t, click “Send”
• Enter the person’s name, email address or phone number 
• Enter the amount of money you want to send 
• If you want, you can add a message or notation 
• Click “Friends and Family” 
• To get their money, your friends and family can open a free PayPal account

Now, what if you want to buy something—either at a retail or online store? Or pay someone—like a babysitter—for their services? The only difference is you’d click “Goods and Services,” which charges the recipient a fee.

There are two ways to transfer your PayPal balance to your bank account after you’ve linked them.

For an instant transfer, which can cost extra and take a few minutes, follow these steps:

• Click “Transfer Money”
• Click “Transfer to Your Bank”
• Select your debit card or bank account under the “Instant” section
• Click “Next”
• Enter the amount
• Review the details
• Click “Transfer Now” and then “Done”

For a standard transfer, which is free and can take one to three business days, you’d follow similar steps:

• Click “Transfer Money”
• Click “Transfer to Your Bank”
• Select your debit card or bank account under the “Standard” section
• Click “Next”
• Enter the amount
• Review the details
• Click “Transfer Now” and then “Done”

Once you’ve become comfortable using PayPal, consider exploring its other services. You could:

• Withdraw cash from ATMs in the MoneyPass network
• Get your paycheck directly deposited two days earlier 
• Deposit a check through the Cash a Check feature
• Earn interest on savings through its partnership with Synchrony Bank
• Buy, sell and transfer cryptocurrencies, including Bitcoin, Bitcoin Cash, Ethereum and Litecoin
• Set up automatic bill pay
• Use PayPal Key, a 16-digit virtual card number that can be used anywhere Mastercard is accepted. That could be handy for businesses that don’t take PayPal directly.

It takes just a few steps to pay using your rewards with PayPal. And you can do it at millions of online retailers, including Target®, Apple® and The Home Depot®. 

1. Shop online at any participating retailer.
2. When you’re ready to pay, choose “PayPal Checkout” and select your Capital One rewards card as your payment method. 
3. Choose “Use Capital One Rewards.”

You’ll be able to apply as many of your rewards as you want. Don’t have enough to cover your purchase? Pay for the rest using your Capital One credit card, and you’ll start earning rewards that might go toward your next purchase.

With a digital wallet like PayPal, some financial transactions can be done in a breeze. And PayPal offers many more services beyond just making purchases and money transfers. 

Ready to use your Capital One card with PayPal? Learn more about adding your Capital One card to your PayPal wallet.