What Is PayPal?

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     In September of 2000, I posted a three-part journal cataloguing the year-long process my wife and I undertook to get our online art business up and running. No sooner had we posted the site did we begin getting questions about PayPal. Many people wanted to know if we would accept payment using their transfer system.

To be honest, I had hardly given PayPal a thought. Yes, I had seen the little PayPal images while surfing around eBay, but never used it. In terms of the site, I never considered it past a casual interest.

It wasn’t until we began to list auctions on eBay that I really become strongly interested in PayPal. Others who were helping me on my quest to sell over eBay told many stories of bad checks and non-payment. Some went as far as saying they wouldn’t accept checks at all, not even bank checks. They wanted PayPal customers. It really shook me when a couple of possible buyers on my wife’s art site told me that unless I accept PayPal, they wouldn’t buy.

That struck a nerve. When the customer begins making such demands, it’s time to look into the service.

Depending on whom you talk to, it’s either the greatest thing on earth or the dumbest way to transfer money (nicknamed “beaming”). The basic concept is this; PayPal offers a secure service through which funds can be transferred from one PayPal account to another.

(Technically no funds are actually transferred. PayPal is just a running total of how much one account was given from another and vice versa. It isn’t until someone “cashes out” that money is actually “moved”.)

The transfer is immediate and guaranteed. PayPal won’t transfer funds unless the buyer has a credit line (or amount in bank account) to make the transfer. No, PayPal is not a bank. Thus, their accounts are not federally insured in the same way as a traditional bank account, however they do offer their own private insurance. As of the time of this writing, the insurance was provided through the Travelers Group.

The fact that the money is transferred from one PayPal account to another, rather than right to the user, is important. We’ll get to why in a moment.

In order to participate in PayPal, you must sign up to be a member. Right now (April, 2001) it’s free. In fact, it remains a free service as long as you remain only a buyer, meaning money only moves from your account to someone else’s account or you request from your own monetary sources.

In order to sign up, you are asked all the basic questions, plus you choose the traditional login and password. Your email is proven active by the computer sending you your confirmation number. You get the number, return to the site, and finish the process.

After signing up, you are asked to enter either a credit card number or bank account. Either way you go, or even if you choose to allow both, the computer system performs a check. If the accounts are active and have sufficient funds, you’re good to go.

You’ll be one of over 7 million beaming money from account to account.

This is always big concern of mine before I sign up for any site that proclaims they work for free. If it’s all free…where are you making your money?

To begin with, PayPal is not free if you are a seller. In fact, there’s a pretty fancy fee structure to use the service. The maximum amount you can be charged is 1.9% or your sale plus 25 cents. Now, that’s the maximum mind you. If your sale is under $15, you pay a quarter.

But this thing is, PayPal isn’t only getting rich off of those fees. Where PayPal is making quiet cash is interest. Remember above when I said that money is transferred between PayPal accounts? Well, as long as the money hasn’t been taken out of the PayPal account and put to a credit card, bank account, or sent to you in the form of a check, PayPal holds the money in their account. While the money is in their account, they gain interest. It’s a process called a “float”. Those of you who have taken money out of your PayPal account also know that the transfer is not immediate. Even after you ask for your money, there is still a waiting period. The float is enforced even then.

Don’t get me wrong, the process is purely legal and actually pretty clever if you ask me.

Let me put it this way, the site my wife and I put together accepts credit cards. In order to be able to do that, we had to set up a secure server, attain a secure certificate from Verisign, and have a shopping cart / checkout system programmed for us. It cost us a fairly decent amount of money.

With PayPal, one can basically bypass all of that. I have seen numerous mom-and-pop level online stores that proclaim they accept PayPal as payment. The basic concept is that someone sends an email requesting to buy an item. The seller approves the sale. The buyer then goes to PayPal and makes a secure transfer of funds.

An email letter arrives in the seller’s box with the text “You’ve Got Money!” It’s a take off on the AOL “You’ve Got Mail!” Get it?

The email provides a link. The seller clicks to check to make sure the correct amount of money has been transferred from one account to another. If all is on the up and up, the seller can download the payment onto a credit card, into a bank account, or request a check. The transaction is finished and the product is sent.

Furthermore, the PayPal process is not just for e-business. Let’s say I owe you $20 from dinner last night or I picked the Browns over the Steelers and lost. If we’re both PayPal clients, I can pay you for dinner or pay off that bet. (Although I don’t know that PayPal would be too happy if they knew people were paying off illegal bets).

A transfer, is a transfer, is a transfer be it e-commerce or just two friends making things even-Steven.

Heck, you can now even download PayPal onto your Palm device.

Before this begins to sound like a ten-page advertisement, allow me to address some of the down sides I found with the service. Please understand that these statements may become invalid as the PayPal system changes and updates.

For one, you can only deal with a client that has PayPal. If you run an e-business and only accept PayPal, you limit yourself to only those who are “in the club”. You may not think that is such a big problem since the service has customers numbering into the millions, but compared to the number of people who have credit cards…you’re limiting those who can use the system. To that end, I see PayPal being only one possible method of payment rather than being the end all for an online business.

It use to be that PayPal didn’t accept international customers. Well, they do now so this isn’t much of a down side but I thought I’d mention it anyway.

Lastly, and this will probably tee off some real PayPal fans, PayPal isn’t seen as the “correct” method of online buying. I am only working with what I have read and heard from others, but I have found that many people see PayPal as something that works for auctions but not for true e-commerce. That is reserved for credit cards in many people’s eyes.

To further that statement, I don’t see the major online e-commerce sites rushing to accept PayPal. They are staying with traditional credit card transactions. I have had people tell me I must put PayPal on my wife’s site while others have told me that a PayPal logo would cheapen the site.

I only offer this information as an aid to help you make decisions regarding you using or accepting PayPal. Obviously you can make the decision to get into e-business using nothing but PayPal. Many are doing just that. It’s cheaper, easier, and some claim, more secure than any credit card transaction.

To be fair, I should point out that there are other systems that work in a similar fashion to PayPal; Billpoint, TradeSafe are two other big ones, but PayPal really does lead the pack by a large margin.

PayPal is now allowing oversea accounts. They are going to sign up a ton of new people. They are going to be huge. I think the main concern they will have to contend with is if they can break out of that “auctions only” stigma and be seen by the e-population as a method of buying equal to credit card usage.

That’s the tough part.

 Enjoy!