What's the purpose of PayPal?

Question

When purchasing through PayPal it draws funds from my linked bank account in the amount of purchase price and applies it as payment to the merchant. This is exactly what my debit card does, so what do I need PayPal for?

Answer 1

PayPal, initially, was designed to allow easy online transfers between people who are not established merchants (hence the name).

It very quickly became a payment processor of choice for eBay, which in turn was also designed for ad-hoc transactions between people who are not established merchants.

Since then online marketplace has evolved significantly, and there are a lot of ways to transact between non-merchants, and the entry barrier to become an established merchant is now significantly lower (to the point of not being existent altogether in many places). As the result, PayPal is "just another" payment processor at this point.

Answer 2

When Paypal launched over 20 years ago, it wasn't easy to set up a merchant account as a small seller. You'd need to set up full business banking, then get a credit/debit card machine. Card fees were higher as well. Bank transfers were also far harder to arrange than they are now. Don't forget, we're talking about 1999:

• No smartphones.
• Online banking existed but was pretty basic.
• To pay money into someone else's bank account meant a visit to a bank in person.
• Transfers were slower than they are now and/or expensive (at least here in the UK, where I can send up to a few thousand pounds without a fee to any other UK bank account, within 2 hours).

So the alternative was cash or cheque (check). Cash is fine if you're meeting up and not worried about robbery. Cheques are slow, especially if you have to post them, and open routes to fraud.

So Paypal targeted small transactions, including in ways similar to Venmo these days (which isn't as popular in the UK as in places where bank transfers are more hassle).

But Ebay made a big difference: They bought PayPal soon after its IPO and owned it for over 10 years, that's how integrated they were, when other options were few and far between. I did buy things by cheque on eBay, and once or twice with cash (even in the post for very small amounts). And if you wanted to sell online in small volumes, perhaps as a hobby project, eBay was the most likely way to do so. This was before Amazon Marketplace or Etsy, and while off-the-shelf web sales packages existed, they were cumbersome and required sysadmin and security skills.

Now eBay supports credit card payments directly, but still has PayPal integration for buyers. There's Stripe for small sellers with their own sites - but many of them support PayPal as well. With no pressing reason to migrate off it, I use PayPal on eBay and to pay for a few other things (like training sessions and sports club events), though the latter seem to be moving more towards Stripe; I'm told it's less hassle and cost for the organiser.

Answer 3

While other answers focused on the merchant and historic perspectives, I wanted to answer this also from a consumer perspective.

Paypal allows me to:

• Avoid giving my card number out to a large number of merchants
• Have an ongoing payment relationship with merchants and be able to select which card I use (due to one having expired, been stolen, etc) easily
• Use less-widely-supported cards (i.e. amex) on websites that still support paypal
• Send money to people without their banking information, which can be useful for collecting money for, for example, a special day of a coworker in a company setting

Overall paypal is not that mandatory to transact online (I lived for a long time in a country that had paypal banned without facing many issues), but paypal is effectively a convenience middleman.

Answer 4

If you live in the Eurozone and other countries/regions with a well developed banking system, it's indeed obsolete as of 2023. Instant SEPA payments let you transfer up to 100k EUR within 10 seconds to any other account in the eurozone, usually for no fee or for a very small fee. Unfortunately... not everyone lives in the Eurozone and even those who do often need to pay money to people outside the Eurozone. That's where merchants like Paypal come in, as regular bank transfers take a lot of time (2+ days) and the fees for international transfers can be outrageous.

Same applies for payments within the US - wire transfers take 1-2 business days and my bank charges $4/payment. So everyone I know use Venmo or Zelle for amounts smaller than a few thousand dollars when sending money to each other. This will probably change in the next decade but for now we are stuck with companies like Paypal serving as an intermediary.

Answer 5

Speaking of the situation as it stands today and from the technical and business side of things, it's still much easier and cheaper to just implement a PayPal button on one's website then to deal with credit-card information at all. Even if you use a card-processing service like Stripe or Braintree, which allows "hosted" fields (inside iframes) on your payment page, the implementation of those is fairly involved. More importantly though, you are still required to adhere to PCI Compliance (Payment-Card-Industry). This means you need to attest to the security of your cardholder-data environment, run security scans on your site, potentially run log-analysis and intrusion-detection software, meet certain training requirements for your employees, etc. PCI Compliance itself has become a multi-million, or maybe billion dollar industry. There are entire companies dedicated to offering services to help merchants meet PCI compliance. Avoiding that if possible is well worth it.

Here's some more info on PCI Compiance:

• https://www.pcisecuritystandards.org/
• https://www.forbes.com/advisor/business/what-is-pci-compliance/

Also from the customer's perspective: there are many sites where I'd think twice about entering my credit-card information to purchase a product, but since they have a one-click PayPal button I end up buying from them.

Answer 6

I've set up merchant accounts for $100,000/year businesses.

Depends on the merchant

For a person to receive money via credit or debit the normal way, they must have a merchant account. In the last 10 years they became much more accessible, thanks to companies like Square. But it's still not for everyone.

But you're talking ”payments online". That is much worse. That involves sending your details electronically, and there are tough security rules called PCI-DSS in North America. They have absolutely brutal consequences for data breaches, that typically bankrupt the small business. Go look up the many, many pages of forms needed for even level 1 PCI-DSS compliance, and ask yourself "If I was a small business, could I do all this, honestly?"

Yeah. InfoSec doesn't scale. There is no such thing as "discount InfoSec" for small businesses - if you can't muster an InfoSec team the size of Target's or Home Depot's, you will have a worse outcome and that's that. You might as well stay home.

So we "stayed home". We use Square* for card-present transactions, a large event ticketing provider (and their merchant account**) for ticketing, and PayPal for donations and gift shop sales.

So you say you have an online merchant you want to deal with, but they maddeningly will not take your credit or debit card details? Yeah. They may have reached the same conclusion as I did regarding their risks handling customer card data with PCI-DSS. It just makes more sense to them to use an intermediary like PayPal.

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* actually we don't use Square, we use a direct same-service competitor, and that competitor happens to be called PayPal Here. But that would only muddy the conversation, and it doesn't have anything to do with our use of PayPal online.

** we pay maybe 0.6% more for letting PCI-DSS be their problem. This is less than $500/year we would gain by making PCI-DSS our problem.

Answer 7

Personal experience:

When I was a young lad, before I had my own wage and credit card, I used to do some online paid surveys which allowed me to get paid. And PayPal was the only viable option for me to cash in and spend my relatively hard earned money back then.

At least a dozen of years later, I will have to admit that, since I have a job and my own credit card, I don't use PayPal as much as I used to. But it can still be handy sometimes:

• Some online shops allows you to choose the "payment in 4 times" without extra fee, but only through PayPal, which can be helpful for some people to manage their budget. Of course, if the option is also available without PayPal, this is moot.
• Recently, I have made some purchase from some German online shops, which offer payment methods which are different from my own country (I cannot pay with my bank information nor credit card information). However, since PayPal is in the list, I can use my credit card through PayPal. The only other options I had were to either send a check by mail, or pay at delivery (which I don't believe is a good solution, considering I don't live in Germany);
• If you happen to be purchasing from an online store which turns out to be a scam, you will have an easier time retrieving your money if you paid through PayPal. Luckily for me, my bank is one of the few rare banks which don't plainly tell you "you made the payment yourself, we cannot help you", but it's still a real pain to get your money back. With PayPal, it's much easier.
• I also have a close acquaintance who still prefers to send money over PayPal for convenience, because her banking service is a real pain for people with physical disability to navigate through, whereas she's having an easier time using PayPal.
• As a bonus, if like her and unlike me you don't have a credit card with zero fee conversion rate for paying in a different currency, PayPal is still reasonably cheap for that purpose.

In short: I can make do without it most of the time, but there are still situations during which it can help.