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?

Not sure what the current status is, but when I signed up with Paypal it was because especially international vendors were reluctant to accept my (German) debit cards or bank transfers - Paypal basically was an alternative to a credit card. Also unlike money transfers, it worked instantaneously. This might be history by now, so just leaving it as an somewhat relevant tidbit. — Eike Pierstorff, May 18 '23 at 21:54
When you transact on the web or in an app do you give your debit card info to Bob's Discount Widget Emporium and trust them to have a top-notch cybersecurity staff and experts in secure software development and PCI compliance? Or do you use a layer of indirection? Certainly there are plenty of alternatives in that space, but it's still useful. — Jared Smith, May 20 '23 at 00:10
Internationally, PP is cheaper then sending a wire transfer for small B2B transactions. And a heck of a lot less hassle. — Spehro Pefhany, May 20 '23 at 18:44
@JaredSmith Hmm, this might be my German bias, but there is nothing insecure, at least in this country, about providing debit card information. If you see a fishy transaction, you just tell you bank "wasn't me", and it's reversed without any red tape. (One of the many things were cryptocurrencies fail, btw.) — henning, May 22 '23 at 07:22
@RodrigodeAzevedo except when it's a fail (i.e. when you need to dispute a claim). — henning, May 22 '23 at 07:28
@henning Disputes are a legal matter. Arguably, the whole point of cryptocurrencies is to move towards a jurisdictionless zone. If you need to have the option to dispute, use SWIFT instead. — Rodrigo de Azevedo, May 22 '23 at 07:42
@henning We have Sofort in Germany, so we don't need Paypal for online purchases. Netherlands has iDeal, Sweden has Klarna, other systems exist in other European countries. — gerrit, May 22 '23 at 08:26
@henning same situation in America...assuming you notice the transaction, assuming the fraud didn't deplete your bank account and cause checks to bounce or automated payments to fail in the interim, etc. etc. I don't even use debit cards but even with credit cards where the remittance is even easier I vividly remember having a big fraudulent transaction go through right before I was to leave on vacation. The company caught it and called me and cancelled the card and shipped me a new one, but I had to take that trip without it when I'd been planning to use it. — Jared Smith, May 22 '23 at 11:07
@henning n.b. with cryptocurrencies nobody can withdraw from your account - you have to deliberately send it. — user253751, May 22 '23 at 14:44

score 46 · Answer 1 · answered May 17 '23 at 21:52

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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.

answered May 17 '23 at 21:52

littleadv

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PayPal theoretically still offers some theoretical advantages in person-to-person transactions where neither party is entirely sure they can trust the other. That aspect of it was a near-necessity for eBay's growth. – keshlam May 17 '23 at 22:34
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@keshlam that's questionable. My experience with PayPal is extremely negative and I'm now trying to avoid it at all costs. What is advantage to one (the ease of disputing transactions by buyers) is a severe disadvantage to others (think of the merchant who now needs to deal with that arbitrary negative decision and no recourse). There's way too many opportunities for scammers when using this service where it is not properly regulated. In Europe, PayPal has been forced to adhere to the banking regulations, but in the US - it's a wild west. – littleadv May 17 '23 at 22:42
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I've only dealt with them as a buyer. And frankly, if I didn't have them in the transaction, despite all the negatives they represent for the seller, I might not buy. There have been scams running in the other direction too, y'know, which is why PayPal came into existence. Most people are honest; unfortunately a market like eBay attracts those on both sides who want to get away with something. If you're willing to get a real vendor account and deal with chargebacks -- and if the transaction can be made secure -- PayPal may indeed be overkill. But it still has valid uses. – keshlam May 18 '23 at 00:43
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@keshlam Supposedly. Practice varies. I had a situation where PayPal decided to freeze my account instead of allowing me to reclaim money from a refund issued by the other party. They took the money from him and then said I couldn't have it because they didn't believe my bank account belonged to me (which for some reason wasn't an issue when they withdrew that money from the same account in the first instance). Ended up having to threaten small claims to get my money back. I don't use PayPal anymore (or Venmo, which they own). – A. R. May 19 '23 at 16:04
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Originally too they marketed themselves as a secure payment medium - back when payment via credit card online was largely untrusted from the buyer's perspective. – aaaaaa May 19 '23 at 16:40
Apparently it's a thing now that fraudulent sellers will sign you up for a "guest account" which has no buyer protections. – Ruther Rendommeleigh May 20 '23 at 10:23
At the turn of the millennium I worked on a project that competed with PayPal; our target market was small sellers on eBay. The typical customer wanted a service that allowed purchasers to push money to the vendor's credit card. – Simon Crase May 22 '23 at 01:15

score 38 · Answer 2 · answered May 18 '23 at 14:30

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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.

answered May 18 '23 at 14:30

Chris H

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Venmo is... PayPal. It's their brand. – littleadv May 18 '23 at 20:18
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@littleadv but targeted quite differently, and founded as a rival of sorts. I guess they wanted a bigger chunk of their original market by buying up the competition – Chris H May 18 '23 at 20:27
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This is the true answer. OP’s question is anachronistic, assuming that the past was the same as the present well-connected world. – RonJohn May 19 '23 at 08:23
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@RonJohn it seems to be happening more and more often - I must be getting old – Chris H May 19 '23 at 15:13
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@ChrisH maybe, but I don't remember people asking this kind of anachronistic question when I was young. Maybe all those Westerns on TV drilled into us that Things Were Different not that long ago. – RonJohn May 19 '23 at 15:57
What was the purpose of PayPal? 20y ago there was no Zelle, +1. Man... bank transfers that used to cost money... "They fuck you with the cell phones!" https://www.youtube.com/watch?v=5JlmZeOW61A – Mazura May 19 '23 at 21:39
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@littleadv PayPal is quite targeted as an international platform and for bigger transactions nowadays, Venmo is US-Only is the CashApp/Zelle competitor for small transactions – Nicolas Formichella May 20 '23 at 08:14
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"To pay money into someone else's bank account meant a visit to a bank in person." I suspect that heavily depends on the country you lived in. In the Netherlands Girotel was available from 1986 over Viditel/Minitel and from 1997 over ISDN, other European countries had similar systems and timelines. – BrtH May 20 '23 at 17:09
To pay money into someone else's bank account meant a visit to a bank in person, even before Girotel and online banking, one could send a written instruction to their bank to transfer money to another account. There were no fees for this service. People actually played chess by Giro by indicating a chess move in the comment field while transferring 1 cent. – gerrit May 22 '23 at 08:13
@gerrit (and BrtH) Cheques effectively served as that written option in the UK - though I believe there was a much less popular way of doing this in writing via your own bank. At some point it started to become possible to do this by phoning up the bank as well – Chris H May 22 '23 at 08:19
@BrtH speaking for Germany, BTX in 1986 had just 60 000 users, and 1 mio in 1996 (and was discontinued in 2001). That's not much, Even if remote banking existed, for basically everybody paying money into somebody elses account actually meant visiting their bank (at least their bank's mailbox). That was one of the charms of Paypal, it used equipment that people by then had anyway, and did not require users to be particularly savvy with technology (but might of course be a country specific experience). – Eike Pierstorff May 22 '23 at 15:42

score 24 · Answer 3 · edited May 21 '23 at 02:14

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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.

edited May 21 '23 at 02:14

Mark Morgan Lloyd

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answered May 19 '23 at 16:58

ave

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Not mentioned but related to the first two bullet points is that the consumer has control over the ongoing payment relationship and can deactivate it through the Paypal website instead of waiting on hold with the vendor and hoping they actual enter your cancellation into their system. – Ben Voigt May 19 '23 at 17:50
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Your first point is a very good one, which was even more true in the past. I kept a low limit credit card for online use as a form of damage limitation; now it's linked to my PayPal account and mainly used for that. Here in the UK, as I hinted in my answer, bank transfers are now the common way to settle up between friends and colleagues. You give away no more information than if writing a cheque, and it saves handling cash. But I get the impression that's easier in Europe than America – Chris H May 19 '23 at 18:20
I agree strongly. When I pay a merchant with PayPal, they only have the email adress associated with my PayPal account; they never have my credit card number so it's not at risk. I don't sell anything, so I always have a zero balance on Paypal. – grahamj42 May 20 '23 at 12:08
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@ChrisH When I receive a cheque, I give no information away. To receive a bank transfer, I have to give my bank details which presents a risk, as Jeremy Clarkson found out. – grahamj42 May 20 '23 at 12:12
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Exactly this. I don’t use PayPal because it’s faster with transactions, or because I somehow lack the ability to do wire transfers (which is what most of the other answers seem to be fixating on), I use it because it centralizes management of such things and provides a useful and generally secure layer of abstraction between me and whatever merchant I happen to be interacting with. – Austin Hemmelgarn May 20 '23 at 13:19
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@grahamj42 but as a buyer you write a cheque, which has your account number, sort code, and full name on it - just the same as when you send a bank transfer – Chris H May 20 '23 at 13:23
I'd add that PayPal means I don't have to enter my address during checkout. And since my shipping and billing addresses are different, when not using PayPal, I have to enter two different addresses. With PayPal, PayPal passes my shipping address along and my billing address isn't needed. – Robert Fisher May 22 '23 at 13:41
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@grahamj42 But it's a trivial risk. Just challenge the direct debit with your bank (not the the third party), and they will refund it. Further, there is no advantage to a scammer in doing this - the list of organizations that can receive funds by direct debit is quite limited; in particular a scammer can't easily set themselves up as one. – Martin Bonner supports Monica May 22 '23 at 13:50
One other reason is that cards expire, and when that happens it's hard to track down all the services and websites to change the details. Paying with paypal guarantees that the card is always up to date and i can change it once to update a lot of services. – bracco23 May 22 '23 at 14:49
@bracco23: Maybe this depends on the location, but at least here in Germany, I have never had to use my debit card number for anything. The virtual equivalent to presenting my debit card in a store is to input/save my account number, and that one is permanent (unless the bank gets fundamentally restructured). In general, this seems to render at least points 2 and 3 from the answer somewhat moot. – O. R. Mapper May 23 '23 at 05:33
@O.R.Mapper that's very location dependent. I can see something similar in the UK with direct debit schemes, but that's not something the average online store can/want to access, or should at all. My experience is that online it's either card or PayPal/GPay/ApplePay etc – bracco23 May 23 '23 at 14:15
@O.R.Mapper I also live in Germany but am part of the growing minority that don't own an EC-Karte/girocard, so those points still ends up being relevant to me. But generally this extends past just cards expiring, if you ever wanted to for ex. switch banks or get a credit card and use that for online spending, then you'll face the same issue. – ave May 28 '23 at 14:52
@ave: I'm a bit confused now. PayPal is a replacement for transfers to a bank account (i.e. instead of logging in to your bank and sending money to the owner of an IBAN, you log in to PayPal and send money to the owner of an e-mail address). The EC card only comes into play when you are physically at the check-out counter of e.g. Lidl and do not want to pay with cash, but instead by presenting your card. Is it also possible to use PayPal in that situation? Or are you saying you don't just have no EC card/girocard, but you actually have no bank account with an IBAN? ... – O. R. Mapper May 28 '23 at 20:21
... With that said, I see the point about using the PayPal account as a "permanent alias" which, over the years, might point to different bank accounts. But then, this may indeed hinge on personal habits - I'd rather estimate my bank accounts to have a longer lifetime than some random online account on a site like PayPal, but your mileage may vary. As an alias for the (regularly changing) credit cards, on the other hand, PayPal does make sense. – O. R. Mapper May 28 '23 at 20:24
@O.R.Mapper I mean paypal for online checkouts, not money transfers. I thought you meant that because your girocard has an IBAN displayed on it (and not a 16 digit number) and that it doesn't change when you get a new card, that you can just keep using it without changing much on sites that support charging girocards directly like amazon. (That said I don't know if any other security details like expiry or cvc are needed in said case so it may not even work if the card is changed.) – ave Jun 01 '23 at 22:41
@ave: Right, but the case is similar: When you use PayPal for an online checkout, you go through the PayPal authentication process and confirm the payment in PayPal to finalize your order. When paying from your account instead, you enter the IBAN to finalize your order. I don't see how the fact that you do not "own an EC-Karte/girocard" has any relevance here, unless you actually also have no bank account. By "charging girocards directly", do you mean the payment method "Kredit- oder Debitkarte" (in particular, the latter part)? When I click that, I am indeed supposed to enter a card ... – O. R. Mapper Jun 01 '23 at 23:38
... number and an expiry date on Amazon. But I'm really not sure what is the point of setting that up as a payment method as you will run into exactly the problems you have outlined. As far as I understand, a debit card is always coupled to a bank account, so you can just as well set up the "Bankkonto für Lastschriftverfahren" (bank account for direct debit) payment method, where you enter the permanent IBAN of the account directly, without the detour via the regularly replaced debit card. – O. R. Mapper Jun 01 '23 at 23:38

score 6 · Answer 4 · answered May 19 '23 at 18:00

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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.

answered May 19 '23 at 18:00

JonathanReez

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The "very small fee" can well make it unusable for small transactions. I buy things from ebay that range from 5-10€. The 5€ shipping is something I just have to eat to physically transport the item, but an additional 2€ for fast online payment is ridiculous. That is 40% of the item price for nothing. On the other hand, if I'd buy a new TV, I probably wouldn't think twice about a Euro or two. – nvoigt May 20 '23 at 06:05
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In Germany, I have never used (nor received) instant SEPA because some banks offer it for a fee and others do not even offer it at all. Paypal may be obsolete for some uses, but that is not because of instant SEPA. – wimi May 20 '23 at 10:52
@wimi aren’t banks obligated to offer it to their customers by now? Even my Czech bank offers it despite not being in the Eurozone. – JonathanReez May 20 '23 at 11:08
This assumes the sole reason to use PayPal is the original designed purpose. See the answer by ave for why people may still want to use PayPal even in places that allow instantaneous transfers. – Austin Hemmelgarn May 20 '23 at 13:17
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@JonathanReez banks are not obligated to offer instant SEPA. The European Commission is proposing to introduce this obligation but that seems to be just a proposal for the moment. Quote from the link: "Many payment service providers are still reluctant to invest in instant payments without having the guarantee that other providers will be able to support these transactions". My bank does not support instant payments, for example. – wimi May 21 '23 at 18:17
@wimi oh... then its far worse than I've imagined. Quite frankly I don't understand why non-instant payments are even a thing still. – JonathanReez May 21 '23 at 18:23
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@JonathanReez probably the banks wanting one day to play with money before they pass it on. No other explanation makes sense. – wimi May 21 '23 at 20:57
@JonathanReez As wimi says, if the banks have your money for a day (or more), they can invest it in overnight markets and increase their profit on transfers. – B-K May 22 '23 at 07:38
There was a Dutch bank that by design delayed bank transfers by 2-3 days. In exchange, they had no fees for their accounts. Their business model was to make money by keeping the money for a little before passing it on. Of course, this applied to bank transfers such as when paying rent or debt payments, not for in-store or online payments. Many customers are fine with paying rent 2-3 days earlier. – gerrit May 22 '23 at 08:18
@B-K but wouldn’t 99% of the banks deposits not move daily anyway? Instant transfers should not affect the bottom line all that much, especially since there would also be incoming instant transfers. – JonathanReez May 22 '23 at 11:12
Just because instant payment has become more ubiquitous and there are more channel for it, that doesn't make paypal obsolete. I personally rarely send money to people i know, mostly pay online to merchants i don't know and always use paypal when available to avoid giving my card details (safer and more convenient). – bracco23 May 22 '23 at 14:46
@bracco23 you don’t need to give your card details for Instant SEPA. – JonathanReez May 22 '23 at 15:19
@JonathanReez instant SEPA is very new, not every bank supports it (one of mine doesn't). the one that supports it often add huge fees, and i'd be surprised to find any online shop that accept that as a payment with a workflow similar to a card payment (so without having to wait 3-5 days to verify payment like you needed with normal SEPA transfers). Online shops it's either card or various payment platforms, like PayPal. – bracco23 May 23 '23 at 14:13
@bracco23 yeah I suspect more EU regulation is needed to make it truly replace PayPal. – JonathanReez May 23 '23 at 14:21
In the US it's going to change this year with the launch of FedWire, which is a system similar to SEPA – littleadv May 27 '23 at 22:41

score 5 · Answer 5 · answered May 19 '23 at 17:47

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:

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.

Harper - Reinstate Monica · Answer 6 · 2023-05-21T01:37:29.003

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.

* 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.

Clockwork · Answer 7 · 2023-05-19T19:41:03.690

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.

What I want to emphasis on in this answer is: your mileage may vary. It might be useless for you, but not for everyone. — Clockwork, May 19 '23 at 19:46

What's the purpose of PayPal?

7 Answers7

Depends on the merchant