How Does PayPal Work in 2024? Everything You Need to Know

PayPal is a platform that has opened countless doors for millions of users in over 200 countries. In fact, 73% of all digital payments made in the UK are done through PayPal. In 2023, the user number is forecasted to increase by 6.7%, to reach 223.3 million, before rising again by 6%, to 236.7 million, in 2024. By 2025, analysts expect there to be 249.9 million global PayPal users, a 5.6% annual increase.

Since 1998, the brand has given companies and consumers an alternative way to facilitate business in an international economy. This makes PayPal a necessary technology for the future of commerce.

What is PayPal?

PayPal is an online payment system that enables individuals and businesses to send and receive money securely, either by phone app or website.

PayPal processes an average of 41 million transactions every single day; up 20.58% from 2019, when an estimated 34 million transactions were processed daily. 

When linked with your bank account, debit, or credit card, PayPal can also be used to make e-commerce purchases. It’s accessed via the web, mobile app, or in-person, and serves as the middleman to keep your bank data secure. 

Fun Facts:

• Headquartered in San Jose, CA, United States
• Supports receipt of 100+ currencies, withdrawals in 50+ currencies, and balance holdings in 25+ currencies
• Owns other finance brands, like Braintree, Venmo, and Xoom
• Provides millions in financial support to nonprofits and charities annually
• Has a dedicated typeface called PayPal Sans

Who Uses PayPal?

Everyone. PayPal has over 200 million users globally, with 29 million merchant accounts. It’s been established for decades and officially gained popularity as the top digital payment option for eBay.

Now, after decades of service, PayPal is used by virtually every type of corporation and consumer in the UK. It has a low barrier of entry, unlike a bank account, so anyone can immediately sign up and start using the service.

How Does PayPal Work?

PayPal works as an intermediary between you and a bank. A user adds a bank account or credit/debit card to the PayPal system, and whenever they’re making an online payment, they can select which account to debit. All transactions are processed through PayPal, instead of your bank. 

Any monies received will sit in your PayPal account and can be used for e-commerce, point of sale (with a PayPal card), or transferred to your bank account. Transfers can take a few days or minutes (for an extra fee). Your PayPal account balance can also be topped off with a bank account or assigned card.

For individuals, PayPal offers simple money transfers, debit/credit cards, cheque-cashing, and e-cheque services. For merchants, PayPal has a variety of services at competitive rates, without long-term contracts. This includes features like PayPal Shipping, Invoicing, Working Capital, and even PayPal Loans. 

Setting up a PayPal account is free, but there are various charges for using the service. It’s a slightly different business model if you’re an individual sending money to friends vs. a business facilitating payments. Fully expect PayPal to send 1099 tax forms if you’re invoicing and accepting payments for services/goods rendered. 

PayPal can be used via websites, mobile apps, programmatic interfaces, or integrations. It provides tools and services to support POS (point of sale), e-commerce, and subscription-based transactions. It safeguards users by offering seller protection, purchase resolution, and the best digital security in the industry.

To sum it up, PayPal:

• Enables online and in-person payments for goods and services
• Provides a way to send and receive money internationally
• Ensures various levels of digital security and payment protection
• Charges a variable and/or fixed fee for services rendered

PayPal can also be set as a default payment method to be used online in place of a credit or debit card. This is what made it such a popular form of payment on eBay.

Set Up PayPal in 4 Simple Steps

How to Receive Payments with PayPal

Receiving payments through PayPal is super easy. You can either give out the email address of your account or log into your PayPal account and click the “request” button on the right-hand side. 

Enter the sender’s email and click “next.” Enter the amount, currency type, and a note (optional). Then, click “request now.” That’s it!

You can also request money with PayPal Invoicing. It’s a free service that enables a user to quickly create and send customised invoices via email or a shared link. You can even break up the invoice into partial payments or request a tip for services rendered. From the dashboard, view the billing history to track payments and send reminders on past-due invoices. 

Withdrawing Payments to Your Bank Account

To withdraw funds from your PayPal balance to your bank account, log into your PayPal account, then follow these steps:

1. On the summary page, click the “Transfer Money” button right below your PayPal balance. Users can also access this option via the “Wallet” menu in the top toolbar.
2. Click “Transfer to your Bank”
3. If you have multiple cards or bank accounts attached to your PayPal account, you will then be prompted to choose which one.
4. Click “Next” and enter the amount you want to transfer. “Click “Next” again.
5. On the final page, review the transfer amount and click “Transfer Now” to finalise the transaction. 

PayPal eCheques 

PayPal echeques are used when a buyer doesn’t have a credit card or alternate source of funding attached to their PayPal account. When the buyer sends payment, the funds are transferred from their bank account to the seller’s PayPal account. The electronic payment is essentially funded by the buyer’s bank. 

An e-cheque must clear the bank before it is credited to the recipient’s PayPal account. This can take anywhere from 3 to 6 business days. It all simply depends on the bank involved. 

PayPal e-cheques are like writing a physical cheque from your bank but sending it through digital means. Of course, most people scoff at writing any sort of cheque these days, but an e-cheque is a good payment method for those who don’t have a credit card or prefer to pay directly from a bank account to avoid fees.

Before taking any action, the sender should make sure there are enough funds in the bank account to cover the amount they are sending. If you are short, the bank will decline the request, and PayPal may follow up with a second request. This can result in more than one overdraft fee for a single charge, and end up a complete mess. 

PayPal Instant Payment

An instant transfer differs only slightly from an e-cheque. It’s a way to facilitate payment from your bank account, through PayPal. In this instance, the seller is credited immediately while the request is processed. 

All that’s needed for this type of transaction is a confirmed, UK bank account, with enough funds to cover the whole payment.

In the case of instant payment, it’s also wise to have an unexpired backup funding source, like a credit or debit card. This is just in case your payment request is declined through the bank. All of this data can be changed immediately before requesting an instant transfer. 

PayPal for Business

PayPal is a slightly different animal when it comes to business transactions. It still functions the same, as it would for a sole individual, but there are additional perks if you are a merchant (and a paying one at that). The following are some of the most popular merchant tools on the market for PayPal right now:

Payment Options

PayPal offers an array of payment options for companies, which includes:

• Credit cards
• Debit cards
• Venmo
• PayPal platform
• PayPal Credit

Business Debit Card

The Paypal Business Debit Card can be used anywhere that Mastercard is accepted. The standard cashback rate is 1% on eligible purchases, and the card can also be used in the ATM (for additional fees).

PayPal Invoicing

PayPal Invoicing is free to use. Anyone can quickly create and send custom invoices via email or shared link. 

The service will also allow you to accept partial payments or tips, with transactions tracked, every step of the way. A business can also view billing history, monitor payments, and send past-due reminders automatically.

PayPal Working Capital

The PayPal Working Capital cash advance is based on your PayPal sales, account history, and other criteria. Cash advances range from £1,000-£125,000 for first-time applicants (and up to £185,000 for subsequent applicants).

Here are a few things to know about PayPal Working Capital:

• There are never any late fees, periodic interest charges, prepayment fees, or penalty fees
• Amounts can range from £1000 to £125,000
• The maximum amount can be up to 35% of your annual sales, and up to £185,000 for your first loan
• Loan terms vary based on PayPal sales
• Payments are pulled automatically (based on a % of your sales that you choose when you apply)

Since this type of loan is sales-based, higher sales equal faster repayments and vice versa. It should be noted, you must repay a minimum of 5-10% every 90 days to keep in good standing. A business can also make manual payments to get ahead.

How Does PayPal Credit Work?

PayPal has partnered with Mastercard to offer a secure digital line of credit. Shop with PayPal Credit’s digital, reusable credit line and get 0% interest over four months every time you spend £99 or more.

Exact terms for each type of credit account may change over time, but here are the basics below:

Credit Cards and Digital Credit

• PayPal Cashback Mastercard – This is a 2% cash back card with no annual fee or purchase exceptions
• PayPal Extras Mastercard – This is a variable, point-earning card that allows redemption on travel vouchers, gift cards, and cash back to your PayPal balance. There is no annual fee for new accounts. 
• PayPal Credit – This digital, reusable credit line allows U.S. PayPal account holders to shop anywhere online that the platform is accepted. There is no card issued and no annual fee.

Debit and Prepaid Cards

• PayPal Cash Mastercard – This card gives you access to your PayPal Cash Plus account, whether it is swiped at a POS, keyed in online, or used at an ATM.
• PayPal Prepaid Mastercard – This reloadable debit card acts like the cash card, only it’s prepaid. Funds can be loaded onto the card via the no-cost direct deposit service, via transfers from your PayPal account, or through a Netspend Reload Network location. 

Benefits of PayPal Credit

If you’re thinking about using the credit service attached to PayPal, here are a few ways it can benefit your business:

• A business can buy now and pay later. PayPal Credit is a revolving credit line that gives you immediate purchasing power.
• You can avoid interest. Promotional financing with no interest as long as any purchase over £99 is paid within six months.
• A business can easily send money. 
• There’s no annual fee and no cost for maintaining access to your credit line (unlike many credit cards)

Does PayPal Have Fees?

Although PayPal is generally free to use, there are fees associated with transactions, depending on what you want to do. 

Typical rates include:

• 2.9% per swipe for mobile/in-store payments  
• Card-funded payment from a user of Terms for Payments without a PayPal account is 1.2% + fixed fee
• QR Code Transactions – GBP 10.01 and above 1.5% + fixed fee
• QR code Transactions – GBP 10.00 and below 2% + fixed fee

There are never any fees for making an online purchase with retailers that accept PayPal, as long as there is no currency conversion involved.

International Transaction Fees 

Since PayPal is a brand available in over 200 countries, companies have the option of making cross-border payments and international transfers. This process will differ depending on the method used, country, currency, and whether or not both parties have a PayPal account. However, expect to pay some sort of international transaction fee when using the platform. 

PayPal offers two different payment methods for international money transfers, each with its own fee structure. When sending funds directly to another PayPal user, PayPal charges 5% of the transaction, with a minimum fee of £0.79 and a maximum fee of £4.

If the international transfer is funded through a credit card, debit card, or PayPal Credit, the fee will be different. It will include a funding fee of 2.9% plus a fixed fee (based on the currency used) applied. The typical EEA fee stats at 1.29%.

Currency Conversion Fee

If you’re sending an international payment and need to convert the currency, there will be a fee for that too. It’s called the currency conversion fee and starts at 4% of the transaction.

Paypal also charges a fee for the conversion service itself. This starts at 4.5%, and should always be factored into the cost of the total transaction. 

If you’re transferring directly to an international recipient’s bank account, PayPal offers the Xoom integration to help you along. Unlike the fixed percentage fee when transferring from one PayPal user to another, Xoom will add a markup to the current market rate, so just keep those extra costs in mind.

PayPal Apps

The bigger the PayPal brand grows, the more the programme accommodates the different ways people do business. The company offers a variety of applications for every type of hardware, from smartphones to desktops.   

Mobile Apps

PayPal App

There is a PayPal app for iOS and Android, which can be found on the App Store or through Google Play. Through the main app, users can quickly send and receive money, and check on the balance of the account. 

The PayPal app enables users to:

• Track and monitor every transaction
• Send money to friends and family using a phone number or email
• Collect money for a group of people through the Money Pools page
• Link PayPal to a micro-investment service like Acorn
• Donate directly to thousands of approved charities

PayPal Business App

Much like the standard app, the PayPal Business app is available on both iOS and Android. The main purpose is to manage all business transactions from the convenience of a mobile device. 

The PayPal Business app enables users to:

• Generate reports on trends, such as monthly, quarterly, or yearly
• Transfer funds between linked accounts, confirm your balance, issue refunds, and view transaction details
• Create and send invoices, track unpaid invoices, and send periodic reminders for payment
• Access your PayPal customer data, view their transaction history, and contact them

PayPal Here App

Like the others, the PayPal Here App is available on iOS and Android. It’s a mobile point of sale (POS) app that enables a company to accept debit and credit cards from anywhere on the planet. It must be paired with the PayPal Credit Card Reader to fully function.

The PayPal Here app enables users to:

• Accept payments from major brands like Visa, Mastercard, American Express, and Discover
• Set up employees with special permissions to accept payments on your account
• Create a product/service list that includes photos and descriptions for easier checkout
• View sales reports based on variables like time, services, product, or employees
• Accept contactless payment methods like Apple Pay and Google Pay  

PayPal Web Apps  

PayPal Express Checkout

The average shopping cart abandonment rate is around 69.9%. PayPal Express Checkout cuts down on the number of actions a customer must take before completing a purchase. One visible way it does this is with the “Smart Payment Button.” This button triggers a secure pop-up window, giving the option to pay with a PayPal account, Venmo, or PayPal Credit. This is much more fluid than a customer having to navigate away from your site for payment.

The PayPal Express Checkout app is perfect for business owners and retailers since they’re always looking for a way to reduce friction in the checkout process. Even eliminating one step can greatly improve conversion rates, which leads to higher profits.

The app is complemented by a number of third-party solutions, such as Jotform and WooCommerce. You may want to hire a developer to ensure the app is properly integrated into your site.  

PayPal Subscriptions

If your business involves a recurring monthly fee, like a subscription, PayPal offers a great web app to facilitate the process. PayPal Subscriptions help your consumer base automatically purchase and pay for items on a scheduled timeframe (usually monthly).

The PayPal Subscriptions app enables users to:

• Offer customers free or discounted trials to generate more signups
• Create subscription plans to charge customers a fixed amount on a set schedule or item quantity
• Modify the price of your plans as needed
• Automate payment recovery feature for any failed payments (may need to update card)
• Enable customers to upgrade/downgrade their plans or adjust the item quantity

Benefits of PayPal

When it comes to using the PayPal system, there’s a reason why it’s one of the most popular payment services in the world. Here are just a few of the benefits you can expect from using this product:

Time Management

PayPal helps a business score more buys with speedier chequeouts. It also speeds up the purchasing process for buyers online. There are fewer steps to get to checkout.

Safety and Security

PayPal has focused on purchase protection since its inception. The system keeps financial information secure and encrypted, no matter what site you use. Having an account is like a digital wallet. All financial details are stored and unshared on an encrypted network. The system also offers optional two-factor account logins and email confirmations for transactions, as an extra layer of security.

Rewards and Discounts

PayPal lets a user link all of their credit cards to a single account. You will still earn reward points for purchases on your separate cards.

With PayPal, you can also take advantage of shipping discounts. The system offers a free shipping service with additional discounts on USPS and UPS shipping labels. 

Buyer Protection

PayPal protects all buyers from being scammed with the Buyer and Fraud Protection platform for payments. Users can also ask for refunds on return shipping for eligible goods.

International Business

A PayPal account opens the doors for global commerce, whether you’re a single consumer or an enterprise business. Accepted in more than 200 countries and regions, it always allows people to pay in their preferred currency.

Convenience

As of 2023, PayPal has 435 million active accounts and is the fifth most accepted payment option after all the major credit cards. Offer customers multiple payment processing methods that include Venmo, PayPal Credit, debit card, and credit card—both online and in-person. 

Buying online has never been easier as well. Rather than typing in a series of numbers, expiration date, and three/four-digit code, all you have to do is click the PayPal button. 

If you have a merchant account, the PayPal Business Debit Mastercard is accepted anywhere the Mastercard logo is. That means you can use your PayPal balance everywhere. All you need is your PayPal login information. PayPal can even be used to withdraw instant cash from an ATM (additional fees apply). 

Business Credit and Loans

PayPal allows a business to gain access to loans and capital quickly. PayPal Business account holders have the opportunity to apply for one of PayPal’s two types of business loans. This can give your company the cash flow it needs to grow. 

Integrations

PayPal offers a huge list of integrations to suit every type of user need, from accounting to invoicing, point-of-sale systems, e-commerce, reporting, etc. Expect to see partnerships with top brands like:

• Intuit QuickBooks
• Wix
• Xoom
• Venmo
• And more…

Always Free

It is always 100% free to open a PayPal personal account, and it takes only a matter of minutes to get up and running. You can always upgrade to a business account later, as needed.

In Conclusion

This guide just skims the surface of answering the question, “how does PayPal work?” It’s a multifaceted and dynamic programme that continues to expand and grow along with its customers. 

There is a good reason why PayPal remains one of the best payment services in the world. It’s a highly trusted brand, with market average fees, and a level of convenience that’s unparallelled to any other system in the world.