Is Paypal Technically a Bank?

There is an elderly person who has never done any sort of online banking, but she enjoys online shopping quite a bit. It takes a long time to build up her trust. She has been hearing a lot about Paypal recently and I was wondering if it can be called an online bank and more or less how it operates? What is the easiest way to describe it to someone like this?

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I think that there are still some people who are not sure exactly what PayPal is. While it is a great way to transfer funds between people, businesses and pay for online goods and services, it is definitely not a bank. Paypal is basically a service that makes transferring funds easier. This service is available whether you are an individual or a business.

One of the most agreed upon definitions of a bank is an organization or business that engages in fractional reserve transactions. As I understand it, funds which PayPal holds but have not been distributed are kept in commercial interest bearing checking accounts. Additionally, they are not licensed as a bank but as a money transmitter. In the USA this is handled on a state by state basis.

A good way to think of PayPal is as an online go between. They are a very large and well respected company with millions of users. They allow members to pay online businesses either directly from their PayPal accounts (provided there is a balance held in this account) or have PayPal debit their checking accounts or a credit card which is kept on file. During the entire purchasing process, the customer credit card or financial information is never shared with the online merchant. This makes the transaction safer than having to pay directly. In other words, PayPal is making it safer for these transactions to take place.

If there is ever a problem with the transaction, PayPal will continue to act as a go between and resolve the situation. Since both the purchaser and the merchant have signed up with PayPal and agreed to their terms and conditions, they also agree to the mediation process.

PayPal is wholly owned by Ebay, the online auction company. They have now made it so that anyone who wishes to sell their items on eBay must use PayPal as their default transaction method. This has obviously brought a lot of new customers and business to the site.

PayPal does charge a commission for each payment transferred. However, the idea is that this is an easy way for a business to establish an e-commerce presence online. There is no real need for them to go through the hassle of obtaining a merchant account. Instead, just sign up for PayPal and then post some payment buttons or links and they are in business! As a business makes sales, funds will accrue in their PayPal account. At any time they can choose to have these transferred either electronically to a connected bank account or request a check.

The whole idea here is that PayPal is EASY. It is easy to sign up for an account, easy to do business with them and easy to transfer payments. Not only easy, but it is also safe.