What is PayPal and how does it work on eBay? A PayPal Primer

Understanding eBay's preferred payment system

When you see the PayPal logo in a listing, you know precisely how to pay..

One of the first things you'll notice when you begin to use eBay as a new user is the pravalence of a payment system called PayPal. A majority of auction listings on the eBay website list PayPal as a payment option (along with a set of credit card icons), and when you buy you'll often be asked if you'd like to join PayPal in order to pay for your item.

So what is PayPal?

PayPal is an online payment system that facilitates the exchange of money between eBay traders.

PayPal is has been owned by eBay for a number of years (though the two companies are set to be divided into independent interests later this year), and a strong majority of eBay members are also PayPal members. When you join PayPal, you are given a PayPal "account" that can hold money, similar in some ways to (though very different in other ways from) a bank account. As a PayPal member, you are able to:

  • Transfer money from your bank account to your PayPal account
  • Get a cash advance from your credit card and deposit the amount in your PayPal account
  • Transfer money from your own PayPal account to another member's PayPal account
  • Transfer money from your PayPal account to your checking or savings account
  • Have a check mailed to you for the balance of your PayPal account
  • Get a PayPal debit card that you can use to make real-world purchases from your PayPal account

Given this dizzying list of features, it's instructive to note that PayPal is most often used for simple auction payments, with the process looking something like this:

  1. Buyer wins an auction or makes a purchase. A bidder makes a purchase from a seller that accepts PayPal as a payment method.
     
  2. Winning bidder checks out using PayPal. From the My eBay page or on the auction listing itself, the winning bidder, who is a member of PayPal, clicks on the "Pay Now" icon next to the completed auction.
     
  1. Money is moved automatically. By checking out using PayPal, the winning bidder automatically triggers a transfer of funds from his or her preferred payment method (either credit card or bank account) into his or her PayPal account. These funds are then immediately transferred to the seller's PayPal account.
     
  2. Seller receives funds. With the funds now in his or her account, the seller is now free to either transfer them to his or her bank account(s), have a check mailed from PayPal, spend them in the "real" world using a PayPal debit card, or use the PayPal balance to make other purchases on eBay.

Though it may sound complicated at first, you'll find that in practice, this process is about as painless as an online payment system could conceivably be. It is repeated hundreds of thousands, if not millions of times every day on eBay's website.

As you can see, PayPal is an exceptionally quick and easy way to expedite online commerce. There are a number of benefits to using PayPal for your auction payments (both sending and receiving) as opposed to other methods:

  • Flexibility for sellers. With a PayPal membership, even very small volume sellers can quickly and easily accept payments that originate from buyers' credit or debit cards.

  • Quickness. PayPal transfers between sellers are instant, and transfers from PayPal accounts to bank accounts only take a few days. This makes PayPal a much faster method for money exchange than paper methods such as checks or money orders, which take days to arrive and days more still to "go through" once deposited.

  • Ease of shopping. Because a majority of eBay sellers accept PayPal payments, eBay buyers can simply look for the PayPal logo on any auction and instantly know that PayPal is an accepted method of payment—meaning none of the hassle of trying to follow the many and varied payment directions that non-PayPal sellers often provide in item descriptions.

  • Enhanced buyer safety. Because PayPal offers buyer guarantees at a surcharge and also provides a means for buyers to dispute purchases (if they money they use originates in their Mastercard or VISA account), PayPal adds a layer of buying safety that many eBayers appreciate.

  • Account privacy. Thanks to the way that PayPal works—providing a separate "PayPal" account between which all inter-member transfers occur—no seller who receives a payment need ever see the buyer's credit card or bank account information. For buyers this means a level of account protection not offered by brick-and-mortar stores, where retailers commonly have buyers' account information in-hand after purchases.

  • PayPal makes record keeping easy. Because all of the sales and purchases you have ever transacted through PayPal are recorded in your PayPal account, records of your PayPal transactions are easy to obtain: just log into your account and specify dates or date ranges.

  • PayPal can be used elsewhere, too. As eBay and PayPal have grown, the number of uses for PayPal has also grown. Many online vendors outside of eBay now accept payments via PayPal, and many charitable organizations also accept tax-deductible PayPal donations online.

    Because of these advantages, eBay members who aren't willing to join PayPal often trade at a distinct disadvantage: buyers will find themselves often unable to bid on auctions by sellers who specify "PayPal only" payment terms, and sellers may find themselves receiving fewer bids because buyers who buy "PayPal only" for convenience tend to stay away from non-PayPal auctions in droves.

    Despite the added convenience and popularity among eBay buyers and sellers, PayPal is not without its problems, and they have caused some eBay members to avoid using PayPal to begin with or to discontinue PayPal use after years of PayPal trading:

    • PayPal needs a bank account and credit card. In order to use all of PayPal's features and protections, members must supply both a bank account and credit card information to PayPal. For buyers who shop eBay only rarely, this may be a little too much information to give away.

    • PayPal can get overzealous. PayPal implements anti-fraud measures in an attempt to protect buyers and sellers. When any one of several types of fraud is suspected on the part of a buyer or seller, PayPal sometimes takes steps such as freezing the connected account(s) until investigations are complete or cases can be referred to law enforcement. In rare cases, innocent parties who have accidentally fallen under suspicion have seen their bank accounts locked by PayPal. In order to mitigate this risk, heavy buyers or sellers often connect an account that has a low average balance and that isn't important to their month-to-month expenses, such as a petty cash account or a "just for eBay" savings account.

    • PayPal is not free. PayPal charges any seller doing more than a very modest amount of business a percentage rate for commission. This means that when a buyer sends money, the seller receives slightly less than the buyer originally sent, once PayPal's cut has been deducted. In practice, this means that both buyers and sellers pay for PayPal use, since sellers naturally pass the extra expense to buyers via higher opening bid amounts or higher shipping and handling amounts.

    • PayPal makes it too easy. Though some would say that this isn't really a drawback, others have noted that PayPal makes overspending on eBay as easy as or even easier than overspending at a department store or mall. Thanks to PayPal, it's possible for a buyer to put purchase after purchase on his or her credit card with only a single click, without having to talk to operators, swipe cards, or punch in card numbers. Buyers, beware: when you shop with PayPal, it's up to you to keep track of your bank balance!

      Think you're ready to join?

      If after taking all of this information in you've decided that PayPal might be for you, visit the PayPal registration page to set up a PayPal account for eBay trading today. If you still have qualms or questions, visit eBay's "About PayPal" page or PayPal's "What is PayPal?" page for more information.

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