How Does PayPal Work? [Step-by-Step Guide For Beginners]

Placeholder How Does PayPal Work?  [Step-by-Step Guide For Beginners]

PayPal is a one-in-all payment solution that everyone has heard of. It has been for 20 years on the market and it doesn’t seem like it’s going to leave any time soon.

I bet you had some experience of using this service when you paid for your online purchase or when you transferred $20 to your friend after a Friday evening party.

So I guess you’ve got a basic understanding of how PayPal works, and I do hope that this guide will help you use all the possibilities PayPal offers.

How Does PayPal Work?

Placeholder PayPal

PayPal provides an easy and quick way to send and request money online. You can transfer money (abroad, too) to your family, friends, and auction sites like eBay. PayPal allows merchants to easily accept credit cards in their eCommerce stores.

When you might want to use PayPal?

  • When you buy something online. Using PayPal for online purchases to you keep your data safe;
  • When you pay for a subscription. PayPal is perfect for regular payments. It’s also possible to set your account in a way that the money is taken right from your bank account;
  • When you want to buy something in a brick-and-mortar store. It works for participating shops only, they’ll provide you a one-time QR code or ask for a receipt code;
  • When you want to pay later. There’s a buy now and pay later feature;
  • When you want to simply transfer money to family or friends. PayPal was made for this purpose. Learn about the fees in the fee section of the article.

How Do I Set Up a PayPal Account?

There are two types of accounts that you can set up on PayPal — personal or business. The process seems quite easy for both accounts. Moreover, there is a Q&A page on the PayPal website in case you have any questions on how your PayPal account works.

How to set up a Personal PayPal account

What information does PayPal need to set up an account? Here’s the list:

  • legal first name
  • legal last name
  • your email
  • password
Placeholder set up PayPal account

After that, you add your credit or debit card which is optional. It’s also possible to link your bank account directly to your personal PayPal account. Then you confirm your email address which is a regular procedure. Congratulations! You’ve registered a personal PayPal account.

How to set up a Business PayPal account

The process of starting your business PayPal account is a bit different but it still doesn’t require much of your time or efforts.

First, you have to sign up for a Business account. I used the same data as in the example below.

Placeholder set up paypal business account

After that you should fill in information about your business:

  • legal first and last name
  • legal business name
  • legal business phone number
  • your business address

You also should confirm that you agree with PayPal e-Communication Delivery Policy, User Agreement, and Privacy Statement.

Placeholder paypal business account

After that, the process seems to be the same — you confirm your email address, link to your bank account, and set up payment processing options. That’s pretty much it.

Related posts:

How do I set up a Business account with PayPal?

How to set up PayPal account

What Are PayPal Fees?

There are might be some arguments about PayPal fees. Here I’ve collected the information on the latest fees for the moment of publishing this post. By this time the last update was made on May 7, 2019. So, here come the fees.

Buying is free within the US

Buying online or making in-store purchases within the US — use PayPal and pay nothing as a customer.

Selling — 2.9% + $0.30 per sale

That’s a small price to pay for accepting major forms of payment from any of the 267 million active customers worldwide. There are no hidden PayPal fees. You don’t have to pay anything until you get paid for selling your products online.

Sales within the US
2.9% + $0.30 per transaction
Discounted rate for eligible charities
2.2% + $0.30 per transaction
International sales
4.4% transaction fee plus a fixed fee based on currency received
PayPal HereTM card reader
2.7% when you swipe a card or 3.5% plus $0.15 for manually entered transactions

Transferring balance from Personal Accounts

If you are a U.S. PayPal account holder, you can transfer your money from PayPal in two ways:

1. Standard transfers made using your linked bank account are always free and are usually deposited the next business day.

2. With Instant Transfer, for a fee you can transfer funds even faster to your eligible bank account or debit card. Instant Transfers to eligible banks and debit cards are typically completed in minutes.

Standard transfer to linked bank account
Instant transfer with eligible linked debit card or bank account
1% of the amount transferred, with a maximum fee of $10.00

Sending money to friends and family

These fees may change from time to time, and most changes to these fees will be deemed effective at the time and date of posting.

Sending in the U.S.

If you are a U.S. PayPal account holder sending money to a friend or a family member who uses PayPal in the U.S., you may pay a fee, depending on how you pay.Funded by your PayPal Cash or PayPal Cash Plus balance or a bank account linked to PayPal.Fee is waived.Funded by a credit card, debit card or PayPal Credit.2.9% of the amount funded this way, plus a fixed fee based on the currency of the transaction.

Sending to other countries

If you are a U.S. PayPal account holder sending money to a friend or a family member with a PayPal account in a country other than the U.S., the fee you pay depends on the Payment Method used and the amount you are sending.

Funded by your PayPal Cash or PayPal Cash Plus balance or a bank account linked to PayPal.
Fee is waived.
Funded by a credit card, debit card or PayPal Credit.
2.9% of the amount funded this way, plus a fixed fee based on the currency of the transaction.

How Does PayPal Make Money?

First, I’d like to ask you to check out the statistics to make sure that PayPal DOES grow and it DOES make money, yeah. It’s PayPal’s total payment volume from the 1st quarter 2014 to the 2nd quarter 2019 (in billion U.S. dollars). Impressive, isn’t it?

Placeholder PayPal statistics
Source: Statista

I guess there’s no secret about the way PayPal makes money — it charges fees of different kinds from its users. To be more precise, PayPal charges a percentage of the money transferred. Let’s go into details:

  • Buyers are free of fees. Merchants pay when they receive money from a purchase. If you buy something online and you want to pay using PayPal, you won’t be charged any fee for transferring money to the eCommerce store owner. The funds will be withdrawn from the merchant’s credit card or their bank account. Not from the buyer, anyway.
  • When you receive payments from outside your country or region. There is a fee for sending a payment to someone abroad or for receiving a payment from someone in another country.
  • When you send personal payments using a debit or a credit card. Find out more information on the PayPal fees part.
  • When you transfer money from your PayPal account to your bank account using an eligible debit or prepaid card. There is no cost if you transfer money from your Pay.

How to Send Money Using PayPal?

To send money, you just need the recipient’s email address. If your recipient doesn’t have a PayPal account, they can create one after receiving an email message about transfered money.

Placeholder Send money with PayPal

How to send money through PayPal using your account

1. Start the payment. If you got an invoice or a money request, all you need is to click on the “Pay now” button. If you are looking to start a payment yourself, first you should log in and then tap the “Send” button.

2. Choose the type of payment. There’re two options: you can make a personal or a business payment. You’ll have to confirm the type of transaction — if you’re paying for goods and services, or transferring money to a friend or family member, either in the US or internationally. The fees are different, so make sure all the information is correct.

3. Fill the recipient details. It’s simple — add a telephone number or an email address of the recipient.

4. Confirm the amount of money & currency. Check the information again: the correct sum of money and currency (PayPal allows transactions in many different currencies just pick yours).

5. Confirm the information & Choose how you want to pay. Usually, there are several funding sources: PayPal balance, a credit or a debit card, a bank account.

6. Find the receipt in your mailbox. You might press the “Confirm” button a couple of times again, and you’re done. Check your mailbox, and you’ll find a receipt there that confirms that the transaction was processed.

How to send money through PayPal without an account

To make it happen you need someone to send you an invoice or a money request. There should be a “Pay now” button, which means you can make a payment without logging in.

1. Click on “Pay now” button. That’s pretty much it. Just click the “Pay now” button.

2. Enter your card details. You can open a PayPal account to pay. In case you don’t want to, you simply select the credit or debit card option and enter the details. However, there is a but. Payments without a PayPal account are much more expensive than payments via PayPal.

3. Confirm the payment. It’s classic. You revise all the details, correct something if a mistake was made and the payment is ready to be processed. You’ll receive an email, of course.

Using PayPal for sending money is simple and convenient. And it’s better to have a PayPal account — it’ll save you some money on fees.

How to Withdraw Money from PayPal?

It’s easy to withdraw money from PayPal. To withdraw money to your bank account follow the steps below:

  • Go to Wallet
  • lick Withdraw money
  • Select where you’re transferring the money from, and then select the bank account
  • Choose an amount you want to transfer
  • Click Continue
  • Review your request, and then click Transfer

To withdraw money to your bank account using your PayPal app:

  • Tap your PayPal balance
  • Tap Withdraw Money

There is something to consider: normally it takes 1 business day to transfer the money but it might take longer and there’re some fees for cross border conversion.

How Secure is PayPal?

One of the questions that comes to your mind when you’re thinking of paying online in general and by PayPal, in particular, is “Can I get scammed by using PayPal?”. And it is a good one, we should all care about payment security.

And I’ve got some good news: payment security is something PayPal is famous for. Here’s What we know about PayPal security:

  • PayPal does not send customer data to merchants;
  • Transactions also receive 128-bit encryption, fraud and address screening;
  • PayPal doesn’t retain customers’ information;
  • PayPal’s purchase protection policy claims that in case your order doesn’t arrive or differs from what you’ve ordered you get a full refund.

Of course, we can’t say that it’s one hundred percent fraud-proof but they are definitely are doing their best.

More advanced PayPal options (e.g. PayPal Payments Pro) do need complex setup and extra security measures taken for PCI DSS compliance. But X-Cart, Zoey, and Magento users can avoid the fuss with the PCI Level 1 certified
X-Payments solution.

Related posts:

What are common scams and how do I spot them?

How Does PayPal Credit Work?

PayPal Credit is a line of credit that gives you the flexibility to get your purchase now and pay over time.

You can use PayPal Credit on purchases at thousands of stores that accept PayPal. It’s also available for purchases on eBay and exclusively at thousands of other online stores.

There’s a huge list of PayPal Credit terms and conditions which you should consider if you want to start using the service.

There are some general rates and fees that you should pay your attention to.

Placeholder PayPal credit

Why is PayPal So Popular?

Before we discuss why PayPal is a popular payment option, let’s make sure that it actually is. From my perspective, the best way to do it is to check some statistics and make sure that its popularity is only growing every year.

How many people use PayPal?

There are 286 million active PayPal accounts.

How many merchants does PayPal have?

There are 22 million active PayPal merchant accounts.

PayPal revenue:

  • 2016: $10.84 billion
  • 2017: $13.09 billion
  • 2018: $15.45 billion

Source: PayPal Q4-18

Now that we see how fast PayPal is growing, we can continue discussing its popularity and uniqueness. And there’s a lot to discuss:

  • PayPal is a leader in providing secure transactions for online merchants and buyers;
  • There are two types of merchant accounts for small business owners. The Website Payments Standard account is free to set up. The Website Payments Pro account costs $30 a month;
  • PayPal is widely accepted all over the world so there’s no problem in accepting payments for goods even if your online store is on another continent. That same is for personal transactions;
  • PayPal offers a virtual terminal: imagine you’ve started an eCommerce store, it grew, and you’re opening your first brick-and-mortar store. You’re not sure if you want to spend your money on special equipment and here comes PayPal virtual terminal.

I’m sure there are more features that make PayPal stand out among the competition. I’ve tried to list the most important ones.

How Can You Use PayPal to Sell Online?

So how does PayPal work for sellers? If you’ve started an eCommerce website, you should consider using PayPal that is a safe way to accept payments from your merchants.

With X-Cart you won’t even have to install PayPal — it’s already there. Just make sure that you’re satisfied with the settings. We do care about both your comfort and time.

PayPal is the perfect payment method for mobile commerce as well. So, if you’re thinking to add PayPal to your website you’re in the right place — we offer free (!) PayPal addons for your eCommerce store:

It’s the easiest way to accept payments. So don’t miss your chance.

PayPal Competitors

As PayPal was founded in 1998, it’s hard to compete with it. Over 20 years have passed, and it has so many integrations with… well, everything.

So, I don’t feel like creating a huge list of all the payment processing companies, as we already have one.

Here I’m going to talk about a couple of competitors who are usually mentioned along with PayPal.


The first thing I want to draw your attention to is that Venmo is a subsidiary of PayPal. Venmo allows you to pay and request money from your friends. At its core, Venmo provides a social way to pay your friends when you owe them money (e.g. for a dinner) and don’t want to deal with cash.

If you want to briefly learn their fees, please take a look at the picture below. For more information, check out the Venmo website.

Cash App

Cash App is an easy way to send money, spend money, save money, and buy or sell cryptocurrency. They offer fast access to various financial services. Cash App charges 1.5% of the amount transferred.

PayPal Business Solutions

Are you sure you get the most of using PayPal for your business? I bet there’s something left behind and you’d love to use this or that tool if only you knew. Let’s discover what merchant tools, services, and opportunities PayPal can offer but you are missing them for some reason.

PayPal business app

The PayPal business app is available for iOS and Android. Use it to check your account activity, manage refunds, import contacts, control transaction history, and so on — on the go.

PayPal business debit card

Control your balance wherever Mastercard is accepted with the PayPal Business Debit Mastercard. The cash back rate is usually 1%, it’s also possible to use the card at ATMs to get cash.

PayPal shipping

Probably you never expected that, but PayPal has a shipping service that even lets you get discounts on USPS and UPS shipping labels. Print shipping labels and track parcels via your PayPal account. PayPal Seller Protection covers not received items.

PayPal invoicing

PayPal invoice lets you quickly create and send prebuilt or customized invoices to customers via email or a shared link for free. It’s also possible to check billing history, payments, and send reminders.

PayPal Business Loans

PayPal is ready to offer you two options when it comes to fast access to cash.

1. PayPal Business Loan. Loans from $5,000 to $500,000. This kind of loan is best suited for businesses with at least 9 months in business and over $42,000 in annual revenue. You can check eligibility in minutes online or over the phone.

2. PayPal Working Capital. Loans from $1,000 to $300,000 (loans from $1,000 to $200,000 are available to qualifying first time borrowers and up to $300,000 for qualifying subsequent borrowers). Best suited for existing PayPal customers that have had a PayPal Business account for at least 90 days and have processed $15,000+ with PayPal within the last 12 months.

Build your online store

PayPal has a long list of partners. And X-Cart is on this list.

X-Cart provides a PayPal app. And if you decide to create your eCommerce business, you’ll get the access to the add on, too.

Start Free Trial

PayPal Personal Solutions

Customers have various options to pay merchants. Let’s see what options PayPal offers.


Firstly, let’s find out what an eCheck is.

“An eCheck is an electronic payment funded by the buyer’s bank account. An eCheck must clear the bank before it’s credited to the recipient. It usually takes up to 6 business days for an eCheck to clear and the money to appear in the recipient’s PayPal account.” Definition by PayPal.

An eCheck is a good option in case you prefer to pay directly from your bank account or have no credit card. To use this opportunity, you should have enough money to cover the amount mentioned on the eCheck.

Instant transfer

What is an Instant transfer?

“An Instant Transfer is a way to send money or make a payment from your bank account instantly using PayPal. The seller is credited immediately while our request for the money from your bank is processing. You need to have a confirmed U.S. bank account and a backup funding source such as a credit card or debit card registered on your PayPal account to complete an Instant Transfer.” Definition by PayPal.

PayPal Credit Card Services

PayPal offers various credit and debit cards in partnership with Mastercard. Since terms can be changed, I think it’s better to share the basics.

Credit cards & digital credit line

  • PayPal Cashback Mastercard. 2% cash back, no purchase exceptions, no annual fee.
  • PayPal Extras Mastercard. A point-earning card. You can redeem points for gift cards for restaurants, gas, retail, travel voucher for future airfare, hotel or car rental, etc. No annual fee for new accounts.
  • PayPal Credit. Use PayPal Credit digital, reusable credit line to shop online wherever PayPal is accepted, and get 6 months special financing on purchases of $99+ every time you shop.

Debit & prepaid cards

  • PayPal Cash Mastercard. With this card, you can track your activity, shop wherever Mastercard is accepted, use ATMs, and more.
  • PayPal Prepaid Mastercard. It’s a prepaid debit card. You can load funds to your card via the no-cost direct deposit service, transfers from your PayPal account, or via a Netspend Reload Network location.

Over to You

I hope I managed to answer the “how does PayPal work” question, and if someone asks you a basic question you can be sure you will easily answer it.

It doesn’t matter if you use PayPal for your personal needs or for your eCommerce site, you know it’s one of the most convenient and safest ways to handle online payments.

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Veronika Vaghina
Veronika Vaghina
Marketing Manager at X-Cart

Veronika creates content at X-Cart. She adores writing since her childhood. She loves traveling, climbing, and cooking.

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