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What is Paypal

What is Paypal

Learn more about the widely used online payment system Paypal

If you're shopping online you're likely to use Paypal to pay and the online checkout, but even those familiar with online payment service may still wonder how Paypal works.

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In this guide we answer the question what is Paypal, looking at when you should and should not use it, what Paypal fees are, and how to set up Paypal accounts.

What is Paypal

Paypal is the online payment system made famous by the online bidding platform eBay. Quite simply Paypal is an electronic payment system that allows people to make secure payments to each other over the web.

The key benefit of using Paypal is the way it encrypts your payment details. By using Paypal two individuals or businesses can securely make payments to each other online without worrying about security, whether their money will arrive, or whether their details are safe.

Paypal fees are the way Paypal makes money from securing your transactions, and can be sizeable (see below), but Paypal’s security and wide-reach mean that it is a common online method of payment for everything from eBay and Gumtree to donation sites.

If you wanted to sell your sofa online, for instance, but wanted to ensure a secure online payment, a Paypal subscription would be a great option.

But how do you set up a Paypal account, how much are Paypal fees, how do you cancel paypal payments, and what sort of protection is offered by a Paypal subscription?

Set up Paypal

One of the key reasons behind Paypal’s success is how easy it is to set up an account. Just visit the Paypal website – – and click on the ‘sign up’ button.

What is Paypal?

You can even set up a Paypal account with only your email and a password, although if you want to make payments you will have to include your account and other contact details.

Paypal offers various levels of service, but most users will opt to set up a ‘personal account’. Then it is simply a question of verifying your email address and you are ready to go.

If you want to add your bank accounts there is a further verification process. To make sure the account is actually yours Paypal will usually make a small payment to your account and ask you to verify the amount.

Paypal fees

The key difference between using Paypal and simply setting up a payment between two banks is that Paypal acts as a middleman. The person who pays you doesn’t pay you directly: they pay Paypal. You in turn retrieve the payment not from that person’s bank, but from Paypal.

That simple step allows you to place various safeguards on your money, and it is also the way Paypal charges its fees. Every time you make a payment from one bank to another, the merchant handling your payment pays a very small charge to your bank and card provider.

When you deal with Paypal they accept the payments from both buyer and seller, so they pay these fees. However, they recoup their money by charging a fee on certain transactions. What’s more, as Paypal is holding all the money while payment is being processed they can earn interest on the money they are holding.

There are Paypal fees for making payments by debit or credit card, rather than through linked accounts which is free, and while paying for a purchase is free, withdrawing money from a payment also attracts a charge. You will also pay a fee for any currency conversions.

Paypal is free for all standard withdrawals and to move money into your Paypal account from your bank account.

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Paypal payment protection

One of the advantages of Paypal, and one of its key features is its security. Normally if you want to transfer money between accounts you have to send your account details to the payee, potentially exposing you to fraud.

With Paypal both parties deal exclusively with Paypal, which securely holds and encrypts all their personal financial details. As each party deals with Paypal neither sees each others details, but both can access their money and make transactions.

Paypal also has two additional forms payment protection: buyer protection and seller protection. Buyer protection means that if you order an item and it doesn’t arrive, or arrives damaged or not as described, Paypal will give you back your money plus and postage or packaging.

However, buyer protection is limited to physical goods (so no digital goods or services), and doesn’t cover property, vehicles, airline travel, custom made items, or illegal items.

Seller protection meanwhile covers the seller in the event that the buyer claims the item didn’t arrive, even though you sent it. The same limitations as buyer protection apply, and you need provide proof of postage.

However that’s not to say that other purchases outside of Paypal aren’t covered. If you purchase an item of between £100 and £30,000 in value on a credit card you will be covered by Section 75 protection.

Alternatively if you make a purchase using a debit card you can put forward a chargeback claim whereby your bank requests the payment to be returned from the bank you made the payment into.

It is also worth bearing in mind that Paypal isn’t a bank, and as such isn’t regulated by a bank. In theory, in the unlikely event that Paypal went bust, you could lose your money without the regulated protection in place to cover your deposits that banks have.

Cancel Paypal payment

You can usually cancel a Paypal payment as long as it hasn’t been claimed yet. Simply go to the ‘History’ tab in your Paypal account, select ‘Cancel’ under the Order Status/Actions section, and select ‘Cancel payment’.

However, if the payment has already been claimed you will have to contact the claimant and put in a request. If you can’t come to an agreement then you may have to open a dispute.

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