How Does PayPal Work? PayPal Revenue Model, Sources

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Till the mid-20th century, Wired Transfers remained the mainstream in electronic money transfers. Thanks to Western Union. But then the internet came at the end of the 20th century and later in 1998 PayPal was founded in the United States of America.

In this article, we will understand how Paypal revolutionized money transfers and how does PayPal works within and across borders, PayPal Business model and how PayPal makes money.

But before that let’s have a quick read of the evolution of International Money Transfers.

The history of International Money Transfers goes back to the mid-19th century when The New York & Mississippi Valley Printing Telegraph Company was founded in the year 1851. You might know this company by the name of Western Union now.

The company was the first to introduce ‘Wire Transfer’ to the world. Well, Wire Transfer is a system of electronic fund transfer from one person or entity to another.

It can be made from one bank account to another bank account or through a transfer of cash at a cash office. The company completely changed the way money moved within and across the borders forever.

Many things happened after the internet came into existence. It made the transfer of information and communication easier within and across the borders. It created jobs and made everyone’s lives easier.

While many companies were being formed for making information and communication flow easily, PayPal came as the first online money transfer company in 1998 which eased money transfer within and across borders at a low cost.

PayPal made a drastic change in the money transferring habits of people all over the world. In 2019, there are 286 million active registered accounts on PayPal and the company has their operations in 202 markets.

Now, let’s understand PayPal business model and how does PayPal works.

PayPal Business Model

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PayPal is no longer just an online payments solution provider company. It has now expanded and transformed into a perfect financial tool for a user which allows them too many functions:

✔ Use it as a digital wallet where a user can save their debit and credit cards in PayPal account and access it anytime. Users can even shop online and pay through their PayPal account. They just need to remember the PayPal account User Id and password.

✔ PayPal introduced a new technology ‘One Touch’ which saves user account details securely in the device and lets users check out on a website support PayPal without entering PayPal login details.

✔ A user having a PayPal account can send to and from a PayPal or Bank account to 202 countries and in about 100 currencies. If you have a friend living in the United States of American, then he/she can transfer money from their PayPal account.

✔ User can sell their products or services online and receive payments in their PayPal Business account.

✔ Easily a user can link their PayPal account to websites that pay an amount for showing Ads on the user’s digital property such as a website, app, or a YouTube account.

✔ A user can use a PayPal debit card. PayPal debit card is just like a bank debit card which allows a user to shop online & offline, withdraw money, and get rewards on each purchase.

✔ PayPal also provides a working capital loan which helps in daily business operations at a lesser fee.

After understanding PayPal business model, let’s now understand how does PayPal makes money and how does Paypal works, in short their Revenue Model.

PayPal has revolutionized the online money market. PayPal’s features like online money transfer, debit card & credit card, digital wallet, payment gateways, loans, etc., make PayPal’s worth not less than any bank. So are you still confused about how does PayPal gets paid? PayPal has many sources to get revenue.

PayPal Revenue Sources

1. Transaction Fees

When you make a decision to create a PayPal account, PayPal asks you whether you want to create a personal account or a business account. Do many people have a question in mind that is PayPal free?

In the personal account, a user can transfer and receive money online, shop through their debit & credit cards or through their PayPal account. When you pay through Debit or Credit cards, PayPal charges 2.9% + 0.30 USD every time as a transaction fee. This is the answer to is paypal free.

Business accounts are for those who want to sell their products or services online. The lowest fee, a seller has to pay to PayPal on each sale is 2.9% plus USD 0.35.

2. International Fund Transfers

When a user receives funds from another country, PayPal charges a fee. It includes international fund transfer fees and currency conversion cozy if any.

Are you getting a good picture now that how PayPal makes money? Moving to the next revenue source.

3. Business Account Charges

When someone register a business account on PayPal, there are no registration fees involved there. But PayPal provides certain special features for a business for which it charges as a subscription model. PayPal Payments Pro is such an example of a business account.

4. P2P payment withdrawal fees

It does let you easily receive the money through a link which is custom. Paypal does charge its customers at the time of withdrawal. People do ask is PayPal free so therefore let me tell you that the Charges in United State of America are 2.9% which adds up with $0.30 USD of the total amount that is received.

5. Interests from money deposited

The money in your PayPal account is a source of revenue as PayPal deposits that money in liquid investments through which PayPal gets interest. This interest amount is not shared with you and is mentioned in the company’s policy.

6. PayFlow

Payflow is a service by PayPal which provides a payment gateway to users selling goods or services through a website. It can be integrated by any user with a business account on a website.

Payflow has 2 plan options for their payment gateway service which allows different customization to the website pages:

Payflow Link: This a free Payflow plan where a customer provides their transaction details on a web page hosted by PayPal itself.

Payflow Pro: With a monthly subscription of USD 25, this plan provides an option to a user to design their checkout web page. It provides unlimited checkout customization.

7. PayPal Working Capital fee

PayPal’s working capital loan is a small loan for a business’s working capital needs. You can borrow up to USD 85,000 or 15% of your previous 12 months of sales in PayPal, whichever is lower.

PayPal doesn’t charge any interest but a fixed Working Capital fee and that’s how PayPal makes money from lending.

The fee is charged daily depending on your ratio of sales. The larger the ratio of the daily total sales, the lower the fees.

8. Debit card withdrawal fees

PayPal debit cards allow users to withdraw money anytime but a price. Every time a user withdraws money using the debit card, PayPal charges a fixed fee.

In the United States of America, the withdrawal fees is USD 1.50 per ATM withdrawal.

9. PayPal credit interest

PayPay charges no interest if a user borrows an amount less than or equivalent to USD 99 and pays back in full within 6 months of purchase. But in all other cases PayPal asks an Annual Percentage Rate (APR) of 19.99%.

10. Other sources of Revenue

PayPal has ownership of businesses like Braintree, Venmo, Xoom, etc. This also adds to the overall revenue of PayPal.

In the year 2017, PayPal’s volume of annual payments was USD 451.27 billion. PayPal is the most trustable business all around the world. PayPal business model is simple, that’s why companies want to associate with this Multinational company.

All in All

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This was the complete article on how does Paypal works and a complete study on how does Paypal makes money. I hope we were able to answer some questions like is Paypal free or how does Paypal get paid.

If you have any questions or suggestions then you can mention them in the comments down below.

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