How PayPal Works

email Dan Knight - 2001.03.07

If you've done any buying or selling on eBay, you've probably seen links for PayPal, the leading payment service on the Web.

If you've ever used PayPal, you've got to wonder how they provide a free payment service for so many - and even provide a signup bonus in some cases.

No $5 Bonus

Ever since I started using PayPal, I've had family and friends sign up - and tell PayPal that I sent 'em. I don't think I've even once received a referal fee, and this doesn't seem to be uncommon. A lot of people wrote to express their disappointment - and note that it didn't seem worth pursuing the issue with PayPal.

The Positives

The key is simple: they provide an increasingly limited level of free services in hopes you'll sign up for the fee service, either a business or a premier account.

The beauty of PayPal is that you can send funds (in U.S. dollars) to people all over the world, using either a credit card or your checking account. And it doesn't cost you, the buyer, a cent.

That's nice, especially if you're picking up or unloading some old Mac goodies on eBay. You don't have run to the bank, post office, or convenience store for a money order. There's no risk from a personal check. Funds move through the buyer's PayPal account to the seller's account.

Speaking of which, you can earn money market rates (currently 4.4% APR) on the balance in your PayPal account - and the money isn't tied up like it would be with a CD.

So far everything looks good.

It gets better! When you sign up for PayPal, tell them who referred you, and deposit $100 in your PayPal account, both you and the one who referred you may earn a $5 bonus. Some restrictions apply. (Plug: tell 'em webmaster@lowendmac.com sent you and support this site.)

You don't have to deposit the $100, but for the $5 bonus and the option of earning money market rates, it's not a bad deal at all.

And paying via PayPal is fast; funds usually moves at the speed of email.

The Negatives

One way PayPal coaxes people to sign up for premier and business accounts is a ceiling on credit card transactions. When I started using PayPal, you could accept up to $500 via credit cards every six months. I never got close, but had some friends who did.

PayPal changed that, setting the ceiling at $100 per month. Their positive spin: That's $600 every six months. The negative spin: You can no longer sell items for over $100 with the anticipation a buyer will be able to use PayPal to send you funds.

If the money comes from a checking account or an existing PayPal account balance, there's no problem, but the minute credit card transactions pass the $100 mark in a given calendar month, you're stuck - upgrade your account or lose the sale. (There's also a $2,000 limit on credit card payments you may make in a six month period.)

Do note that there is absolutely no cost to choosing a premier or business account unless you use it to receive funds. There are no transaction fees for personal accounts; business and premier accounts have a 30¢ transaction fee any time you receive funds. If the payment is $15 or more, the fee is 30¢ plus 2.2% of the total for credit cards, 30¢ plus 1.6% of the total for funds from a checking account or PayPal balance.

Compared to what a bank would sock you to process credit cards, this is quite reasonable. If you have 10 sales in a month totaling $500 (half credit cards), you're fee would be $12.50 ($3 for the individual transactions and $9.50 based on 1.9% of total transactions). That averages out to under 2%.

No, it doesn't seem fair that personal accounts can process all sorts of money with no fees at all, as long as they keep credit card sales below $100 per month. That's PayPal's loss leader - and the way they've accumulated over six million customers.

But PayPal is a business, as is your local bank or credit union. They may seem to have free services, but they have to make their money somewhere. The way PayPal does that is by charging heavy users a small percentage each time they accept a PayPal payment.

It's not a bad deal, either, as this page demonstrates. BillPoint, eBay's payment service, gets 35¢ per transaction plus 2.25% or 3% of any transaction of $15 or more. Tradesafe gets 50¢ plus 3.5% of the total sale, even for transactions under $15.

Finally, PayPal is not a bank. Deposits are not insured by FDIC, nor is PayPal regulated by banking laws.

The Final Analysis

If all you do is buy, there's no cost to you in signing up for a premier or business account. You can also get the $5 signup bonus and earn money market rates if you keep a balance in your PayPal account.

If you sell a bit and consistently keep that under $100 per month, stick with the personal account as long as possible. It's free, which is a hard price to beat.

If you are doing enough business that you can't use the personal account, be sure to factor in about a 2% hit on each sale when figuring your minimum selling price.

I have both a personal PayPal account, which use to buy and sell my own Mac stuff on the Web, and a business account, which I set up primarily to speed payment to my writers. As long as they're using personal accounts, it won't cost them a thing to receive money from me - and I save the cost of postage to the U.S. or Canada. And I don't have to worry about the Canadian exchange rate or marking my check "US Funds," either.

All things considered, PayPal looks like a good value for personal and business use alike.

Links

• Sign up for PayPal with Low End Mac as your referral link.