This explanation about PayPal is one of the subjects IAB students need to be aware of and is taken from the IAB Study Text (which is given free to all IAB students when they register with IAB):

PayPal is not a bank, it doesn’t pay interest or give loans. However, the payments system it provides to individuals and businesses is worthy of a mention.

PayPal is a financial transaction broker i.e. cash handling service, providing a payment system that allows businesses and individuals to make and receive online payments between accounts without the need to exchange bank account or credit card details. PayPal can be used for making purchases from businesses or for personal payments between individuals, and also for making payments abroad.

To open a PayPal account applicants must have a valid and reliable email address, a valid bank account and a valid credit card. Accounts are free to open and the service is free to use when the account holder is buying something and making a payment in the UK. Transferring money, for example sending money to friends and family in the UK, is free for those sending and receiving money when the sender funds the transfer from their bank account or PayPal balance. Account holders can also use a debit or credit card or make an international transfer for a small fee.

PayPal accounts can be linked to the account holder’s bank account and debit and credit cards, so users don’t necessarily have to keep money in their PayPal account, instead they can choose to make payment from one of their linked accounts. However, a PayPal account is often regarded as a ‘wallet’ by account holders, into which they can pay monies whenever they wish to do so from a linked account, keep a balance of funds in their wallet at a level which enables them to effectively manage their PayPal account transactions, and withdraw monies from their wallet whenever they want.

As a middleman PayPal makes its money by charging a fee to sellers/receivers of money. PayPal charges sellers a transaction fee of between 1.4% and 3.4% on the total sale amount plus a fixed fee of 20p per transaction. The fee depends on the volume of business conducted by sellers, the higher their level of sales the lower the percentage fee charged by PayPal for its service.

Users of PayPal are able to view and download their PayPal account history which will give them details of transaction dates, types and, if they are sellers, transaction fees. Sellers who are trading as businesses will need to access and use this information for the purpose of posting sales transactions and transaction fees into their accounting records. Sellers can withdraw funds from their PayPal account at any time. Businesses with a PayPal account will need to record details of transfers from their bank account into a PayPal account in their accounting records, likewise receipts into the account and withdrawals from the account will have to be recorded.