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What is PayPal?

Ryan Goodrich, BusinessNewsDaily Contributor

PayPal is one of the foremost online payment services, allowing buyers and sellers to make their transactions through a secure payment portal.

PayPal is an online financial transfer system. It allows businesses and individuals alike to route money to one another securely and without directly giving a person access to someone else’s bank account. PayPal acts as the encryption software that enables people to transfer money between computers and bank accounts.

Overall, PayPal fulfills a wide range of functions:

  • Purchase or sell goods and services through websites like Etsy
  • Send and receive payments for online auctions from sites like eBay
  • Make donations to organizations and businesses
  • Exchange cash with another individual

How PayPal works

When you register for a PayPal account, you must first link your account to a bank account. This connection is how PayPal retrieves and sends transactions; otherwise, you would have to upload funds to PayPal electronically, and effectively make it into a bank account of sorts. When you make a purchase on websites like eBay, you can receive money through your PayPal account or charge your bank through it. PayPal ultimately handles the actual transaction and communicates between the retail store and your bank.

Businesses can use PayPal through the use of shopping cards and online purchasing portals. For many online businesses, PayPal is a convenient way of selling goods online.

PayPal is able to make this service into a viable business much the same way as credit card companies do, through merchant account services. For buyers and for sending money to someone else, the service is entirely free. Companies that accept PayPal as a payment method are the only ones charged for services rendered. The fee is typically 30 cents plus a 1.9 to 2.9 percent surcharge, which may not seem like much until you consider the millions of daily transactions PayPal handles.

The history of PayPal

1998 marked the early start of what would eventually become PayPal, the result of a merger between companies Confinity and Confinity, started by Mark Levchin , Peter Thiel, Luke Nosek and Ken Howery, offered a form of Palm Pilot payment and cryptography service. was started by Elon Musk and operated as an Internet financial service company.

After the merger in 2000, and through the successes of early venture capital funding and strategic transaction partnerships with websites like eBay, PayPal attracted more than 1 million users within the first year and a half of launching.

In the early stages, PayPal found itself a haven for hackers, scam artists and organized crime groups who found ways to use the website for fraud and money laundering. As PayPal attempted to stem these abuses with new security measures, government regulation came into play. PayPal became the target for fines due to violations and questionable business practices.

While such turmoil would be enough to send many businesses under financially, PayPal continued to grow its market share. When the service initially launched, users were charged $10 to join. However, with time, they dropped that payment method as PayPal became the default online payment service for many Web services.

Much of PayPal’s early and current success came from eBay and its users who promoted it as a valuable way of exchanging money for online auctions. PayPal became so popular that it overthrew eBay’s own online payment service Billpoint. eBay eventually purchased PayPal for $1.4 billion and phased out Billpoint, making PayPal the focal point of their billing services. While PayPal is not the required method of payment for eBay purchases, it is among the most popular of options simply because of its ease of use.

Is PayPal safe?

In its earlier days of existence, PayPal had difficulties ensuring the security and integrity of its users’ banking information. With the company’s growth and advances in technology, they now have very few issues with hacking. Account theft, while still a common occurrence, is not technically a fault of PayPal as it can be attributed largely to too-simple passwords or computer theft.

PayPal offers a Buyer Protection Policy, which allows for the filing of buyer complaints within 45 days of the initial purchase. If an item hasn’t been received by that point or doesn’t match the initial description, PayPal will give a refund. A limited Seller Protection Policy is also available to protect against fraudulent claims of not receiving an item.

While PayPal’s user databases have never been hacked, individual login credentials have been obtained illicitly. The most common of these is through phishing scams in which emails direct users to a Web page similar in appearance to PayPal and record any keystrokes entered. In the event of unauthorized account usage, users can put their account on “Limited Access” by reporting the activity to PayPal. This measure restricts account usage until a series of security measures have been taken, such as resetting your password, creating a security question, and verifying personal information.

PayPal’s current numbers

Since 2002, PayPal has effectively become the industry leader in online transaction services throughout the nation. By the end of 2011, the company had effectively extended its realm of influence to more than 100 markets handling more than 25 international currencies.

As of 2012, PayPal handled upwards of 40 percent of eBay’s revenue. The company handles more than $200 billion in financial transactions yearly for the United States and is set to nearly double that by 2016. The service has more than 100 million users and is an accepted method of payment on more than 300,000 websites.

PayPal maintains its standing as one of the most popular financial transfer services on the Internet. Many online stores refer to them as a payment method, and many employers even use it as a way to pay freelance or contract workers. The goal of PayPal is to ultimately make receiving and giving payments easy and pain-free at an international level.

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