How Paypal Works

Basic Concept
PayPal uses encryption software to allow financial transactions to take place securely online. Both individuals and businesses transfer money electronically. PayPal can be used with online auction sites (such as eBay), to purchase goods or services, and to make donations. More than 100 million PayPal accounts are in existence, and PayPal is one of the world's most popular methods of Internet payments.
Infrastructure
PayPal acts as the middleman between merchants and banks/credit card companies. Both buyer and seller provide their bank or credit card information to PayPal, rather than directly to each other. In this way, PayPal serves as an extra security feature, because all account information is held securely by PayPal. There are fees called an interchange, which are charged by banks and credit card companies when a merchant accepts a credit card charge. The interchange is typically around 10 cents plus approximately 2 percent of the charge. PayPal handles these fees for the merchant or payment recipient, and makes the money back by deducting a small fee from the payment before depositing it in the recipient's account. PayPal also makes money on the interest from money left in PayPal accounts before funds are withdrawn.
Creating an Account
Setting up a PayPal account is quick and free and can be done from the site's homepage, www.PayPal.com. You will need to enter your name, address, phone number and email address, then choose a log-in name, password and security questions. Adding a credit card number to your account is optional but will allow PayPal to confirm your home address for added buying and selling confidence. You can also add a bank account to serve as a back-up source when sending funds and/or as an account to electronically deposit funds. After signing up for an account, you will receive a confirmation email from PayPal with further instructions and information about the creation of your account.
Sending Funds
You can send money via PayPal to any person or business with an email address, regardless of whether the recipient has a PayPal account. This can be done by logging into the PayPal account and clicking on 'Send Funds.' The recipient will get an email about the payment, and can then set up an account to access the funds. When purchasing from an online merchant or through eBay, click on the payment option that reads 'Pay Online Securely with PayPal' or a similar PayPal option. You will then be taken automatically to a PayPal page in which you will enter your PayPal log in and password. This information is not shared with the merchant. The money will be transferred from your PayPal account (which withdraws from your bank account, or makes a charge to the credit card you put on file with PayPal, depending on your arrangement).
Receiving Funds
After the buyer sends funds via PayPal, the money is deposited automatically in the receiver's PayPal account (or is held by PayPal until the recipient creates an account). PayPal deducts a small amount in fees according to the predetermined fee structure outlined on its website in the user agreement. The money received remains in the recipient's PayPal account until the recipient chooses to withdraw it.
Withdrawing Funds
There are several options for withdrawing funds from a PayPal account. Money can be transferred to a verified bank account, a check can be issued or the funds can be transferred to a PayPal debit card for online shopping. Other options may be available, depending on the type of user account; simply log in to PayPal and click 'Withdraw Funds' to find out more.