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How Does PayPal Make Money?


The moment you talk about the online transaction, it is impossible not to mention PayPal.

Today, it is almost synonymous with any type of money transfer online.

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Whether you think of paying credit cards or transferring money to friends or family, PayPal is popularly known as the world’s favorite middle-man now.

Perhaps the ease with which you can transfer money online using PayPal is often seen as the biggest contribution.

Compared to the complicated and costly wire transfers that used to happen earlier, the PayPal transfers are absolutely free and minus all the hassle.

But that also highlights a key question in our mind, how does PayPal make money?

This is relevant because when we are getting the service for almost no cost or bare minimum charges, it is interesting to understand how PayPal makes money.

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How Does PayPal Make Money?

This is the question I am usually asked because people know me as a person who knows a lot about currencies and their transactions.

Many entrepreneurs think about running an online business like PayPal.

That is why they want to know how PayPal makes money.

I answer this questions first and then I will tell you what I prefer not to use PayPal in my business.

How Does PayPal Make Money?Maybe that is even more important for you to know if you are interested in running a business like what PayPal does.

Better grasp of their revenue model will also help you better understand the dynamics of online transactions and the primary factors determining the movement of funds and how it can help you make money.

A detailed study of the mechanism based on which PayPal works is crucial to the overall revenue model that dictates the money flow the world over.

1. Understanding the PayPal Business Model

So the primary question is how does PayPal operate?

A premiere e-commerce merchant service provider, it was founded in 1998.

Currently, they cater close to 200 markets the world over and have almost 100 million active users.

eBay acquired the company in 2002 for $1.5 billion, and almost every big business worldwide features in the client list of this company.

Their clients include the likes of Netflix, Starbucks, Dell, WalMart and many other international plays with the global operation.

Online fund transfer is one of the most cardinal functions that PayPal specializes in, and in many ways, has revolutionized the entire concept.

It facilitates this transfer using a simple email address, irrespective of whether you are a member of the site or not.

All you need to do is to link your account to a credit card or bank account and undertake the overall transaction.

However that said, you would surely need a PayPal account to receive the money.

Now let’s reach the crux of the key discussion point; how does PayPal make money if the transactions are free on the website?

Well in this context, you must remember that though the basic account on PayPal is free, there are many other options like Premier and Business accounts which are offered to you for a price.

The Premier account is more suited for amateur sellers, and it allows you to a few other features apart from fund transfer.

It enables access to a shopping cart along with payment reporting tools that are crucial for business deals and those with regular customer interactions.

The PayPal Business Account is essentially targeted for those who handle large-scale online businesses.

This includes several full-fledged players with active online businesses in eBay and other similar accounts.

They have the ability to generate accounts under the name of their business as well as facilitate recurring payments.

Moreover, they have no cap on the debit card use and can even take advantage of extended customer service facilities.

It is needless to mention that both the business and Premier accounts involve some amount of payment to PayPal.

But it is understood that for the business model to function smoothly, just this much of payment cannot really suffice in terms of providing a long-term revenue solution for the most celebrated online middle-man.

Well, there are a few more avenues that PayPal uses to generate revenues on a sustainable basis.

2. How PayPal Makes Money?

One of the best adaptations to the growing need to replace paper money, PayPal, relies on two cardinal sources of revenue to make money.

These are the sources that primarily fund the overall monetary movement that determine the extent of PayPal’s earnings.

What is particularly interesting is that this revenue model was evolved after a detailed and multiple adaptations of the original concept.

As the service provider matured and the range of services expanded, the revenue model underwent a series of changes to reach its current avatar.

So there are some basic routes that PayPal adopts to make money.

These include:

a- Transfer of Money:

Not only was it the cardinal model on which the entire PayPal business is based upon, but in many ways, this is one of its primary sources of revenue for the online middle-man.

You must be wondering now how that is possible.

Doesn’t PayPal provide free transfer of funds from any email account across the world?

Well, the fact is that while most of the domestic money transfers are free, all international transfers entail some fixed charges on the entire transaction.

For all international transactions, PayPal charges a fixed 2.9% of the money that is being transferred along with a fixed charge for being a facilitator of this service.

This percentage, of course, reduces if you transfer more than $3000.

  1. For transactions between $3000-10000, PayPal charges 2.5%+fixed fee
  2. For $10,000-100,000, PayPal charges 2.2% along with the fixed charges
  3. Transactions above $100,000, PayPal charges 1.9% of the transaction along with the fixed mandatory charges. The fixed charges is a basic rate of $0.30 that PayPal levies on all its international transactions.

So in this context, the answer to how does PayPal make money, would be the usual route that most payment gateways offer.

They are offering a service facilitating easy and hassle free fund transfer and charging you a set fee for doing the same.

So it operates more in lines with the escrow format and PayPal in the entire transaction takes on the role of a middleman.

It is needless to mention a lot of it is on account of the safety of operations that PayPal undertakes.

It guarantees both the sender and receiver about the surety of them receiving their funds.

The number of their active users and a number of transactions that happens every day can give you a realistic idea how PayPal makes money through this mode.

The rate of PayPal charges, however, varies from country to country.

These are more or less the basic transaction charges.

There are some changes, of course, depending on the geography and the specific country that PayPal is catering to and that surely impacts the overall payment model that they depend upon.

The format that PayPal operates on to make money is quite similar to that of a payment aggregator.

All the successful fund transactions go through Transaction discount rating.

It is interesting to note that the transaction charges for PayPal are rather low at $0.30 compared to close to 3% percentage cuts that they levy.

Essentially the $0.30 is the amount of money that PayPal requires to process your overall payment and make sure that it is sent to its destination within the specified and the promised time frame.

They currently service close to 200 countries with 2016 revenues close to $11 billion.

  1. This accounted from an annual payment volume of over $350 billion
  2. On an average, every active user undertakes about 29 transactions every year on PayPal
  3. The average weekly one touch PayPal transactions exceed 1.5 million, and 17% of active users use this facility globally
  4. Over 4 million merchants use PayPal now globally
  5. In fact, the annual PayPal payment through the mobile facility increased by 55% in the past few years and averages $100 billion annually. The mobile payment is particularly important as often this is a chosen way of payment given the ease of operation and relatively swift and efficient results. The recent rise in smartphone usage over the last decade or so can also be attributed to the gradual rise in the transaction via mobiles and the rising revenue for PayPal via that route.

What is also striking is the share of international transactions in all these statistics.

Almost 22% of their digital payment was a cross-border transaction.

As PayPal makes money primarily through these international fund transfers, it is needless to mention that it is one of the key revenue indicators to analyze if you want to get a clear perception of how does PayPal make money.

On an aggregate basis, PayPal makes a total of $315 million transactions every day.

Of these e-commerce sales, the share is expected to be less than 25%.

So we can easily assume predominant portion remaining is from fund transfer and from that, you can easily deduce the monthly revenue that PayPal earns from this route.

Given the active number of users range from over 200 countries worldwide makes the mathematics even more complicated.

So overall we can say that PayPal uses this model to make money on a sustained basis.

This is by far one of the most long-standing and primary sources to earn revenues.

As the number of PayPal users keep increasing and the amount of money transfer continues, the revenue for PayPal will keep tickling.

But as you can well imagine, this is not the only source of revenue for PayPal.

b- Arbitrage Value:

PayPal can make money via arbitrage as well.

Arbitrage essentially means taking advantage of two different rates and pocketing the difference as profit.

On an average, PayPal undertakes transactions in 25 currencies globally.

They have their own unique conversion rate.

This is generally at a premium compared to existing exchange rate.

Most times, users ignore this predominantly because of the ease of transaction that PayPal facilitates.

Now have you considered what happens to the difference?

Even this is a few pence every one dollar, multiply with the total transaction that is undertaken by PayPal even on one given day and the outcome, I am sure will make you dizzy.

Let me explain to you how PayPal can make use of this opportunity to make money using an example.

Let’s assume, I am a resident of Unites States, and I am suing PayPal to send $1000 to a friend in India.

The current USD-INR rate is above 64, but PayPal offers around 61.64.

Now I know that this conversion rate is way less than the market value, additionally, I must also pay PayPal about 4% as transaction charges along with the fixed transaction fee.

The mathematics is there for you to calculate and make an assumption.

PayPal will never advertise that they are charging you close to 9% on every transaction but let’s face it; this is the business they are in and want to make money.

So you cannot possibly fault them.

For those, who are not interested, can look for other options where the average rate of conversion and the transaction charges are much lesser.

But the advantage dealing with PayPal is that it has access to 25 currencies, many of them exotic and hard to get a fair rate.

Moreover, there are very few money transfer routes that are as convenient as PayPal in terms of accessing through just your email id.

If you have old parents far away in your home country, often this is the most convenient option to send money, albeit a tad expensive.

But who cares when you can rest assured about the fact that your money is in safe hands and your loved ones who need it will get the money within the promised duration.

There is another form of arbitrage too that PayPal can undertake.

Though it is hard to confirm and the company will not talk about it, it is fairly plausible.

After all, if you are out there to do business and make money and this is surely an interesting window to explore.

Let’s say 1000 PayPal customers transact $1000 through PayPal on a given day.

Now depending on the nature and the type of the transaction that is undertaken, this money will remain in PayPal account for a minimum of 4-5 days.

All of this money 1000×1000= $1 million gets deposited in the PayPal account for those many days till it is not diverted to its final destination.

Now it is up to you to calculate the interest that this kind of fund would generate.

Also, even if there is regular inflow and outflow of funds in the PayPal account, the amount of money that would be there on any given hour/day is sure to attract a basic minimum interest.

This surely can be a way to make money for the celebrated online middle-man.

After all, who wants to give up on some handy cash that they might be able to generate?

So if you ask me how PayPal makes money, this would be one of the alternatives for sure.

c- Interest on Money in Your PayPal Account:

Now let’s say, you are a 70-year old senior citizen staying in Vietnam.

Your son has a relatively cushy job in the US, and he sends you about $5000 every month.

Now given your age and frugal expenses, you do not have to withdraw money every month.

The result, the money remains in your account for more than a month also at times.

Now, you and your son are not the only PayPal users.

According to the last count, this ‘online superpower’ has close to 200 active users, and I am sure most of them do not withdraw the money instantly.

Has PayPal ever offered you any kind of interest?

No, of course not, but that is surely a way for them to make money from the surplus fund that remains parked in their account for a given period of time.

While I would refuse to get into any debate about why or how PayPal earns this money, this is surely a means for them to generate that extra revenue.

When you are exploring how does PayPal make money, this is surely a revenue generation route that you cannot possibly ignore.

You must understand that it is a regular business like any other.

Don’t we know of huge corporates who earn tons of interest in extra cash that might be lying in their account? In fact, it is seen as a big positive for these corporates.

Often it is seen as a sign of financial security; many listed entities even give a share of this money to their shareholders as a dividend.

This reflects rather positively on the company’s fundamentals.

So in PayPal’s case also, we must look at this cash just like we would view it while analyzing the prospect of a banking firm.

Moreover, apart from the US users, the cashing out of money from PayPal electric account is not that simple either.

There are several restrictions that are applicable.

This again means that at any given instance, all the 200 PayPal users are not withdrawing the money they have or cannot withdraw it in many cases.

But the money is safe and secure in that account.

PayPal, which is the safe keeper, in this case, can then easily make money from the cash lying in its account on behalf of the close to 200 million users who access this online middleman quite actively.

d- Online Sales:

Now comes one of the most important sources that helps PayPal make money- i.e. online sales.

According to last collated data, e-commerce contributed to nearly 25% of the total revenue generated by PayPal.

Not just that, the company’s statistics as updated in 2015 indicate that almost 80% of their revenue was an outcome of processing the online transactions of various merchants associated with PayPal.

In fact, as many as 202 of the top 1000 e-commerce retailers in not just US but entire North America engage Pay Pal as their primary processor for payment.

Even a chunk of the remaining 20% is mostly from the processing of transactions by various consumers who use PayPal to buy various products online.

Now you can compute the exact impact when I give you a few more numbers.

  1. PayPal at any given point of time has close to 200 million consumers.
  2. Almost 13 million merchant consumers are associated with PayPal globally.
  3. Globally close to 500 of the top online retailers accept PayPal as a secure means of transaction.

Therefore now if you put this entire information flood in perspective, the exact answer to how PayPal makes money is not hard to gauge.

Also, you must remember that while PayPal was part of Ebay group between 2003-2014, there was a tsunami of payment from people who sold their ware on eBay.

Now you can imagine the kind of impact it had on the average revenue outlook for the company as a result of this association.

What is interesting is for most online sales, this still remains one of the most preferred ways of making payment.

This is simple, swift and convenient with a relatively much larger access than most other similar payment gateways in recent times.

Even for their online sales, PayPal operates on a fixed slab.

For example, the rate they charge for transactions below $3000 and those above $100,000 have different rates applicable to them.

Along with this, there is also the fixed transaction fee that sellers must pay PayPal.

The implications can be well understood given the steady money flow that is expected from online sales in the current scenario.

Independent studies have indicated that e-commerce is a potentially high growth avenue.

According to current data, almost 40% of the current internet users, whether you consider a laptop, desktop or even mobile devices like tablets and smartphones, are steadily joining the group of individuals who are more keen on buying products online.

This 40% totals to almost 1 billion online buyers at any given point of time.

Now you can make rest of the calculation to identify the kind of user base you can boast of and the percentage that uses PayPal.

Therefore if the rate of e-commerce keeps rising, it will soon become one of the top contributors to the PayPal revenue and no doubt, a great way to make money for them over the longer term to keep the growth projections on track.

e- Miscellaneous Fees:

Now these are no doubt the top contributor to PayPal revenue model.

But that does not mean that there is no other way to monetize its services.

Let us remember that one of the biggest contributors to PayPal’s growth is undoubtedly the free money transactions that it has come to become the brand ambassador of.

While you know that you can send and receive money within the United States for free and also open an account free of cost, there are some other services for which PayPal charges you and it no doubt helps them make money.

These include

  1. If you prefer checks to cash withdrawals, PayPal levies basic fees on you. Every check transaction entails a $1.50 fee
  2. International transactions all carry a fixed fee as well
  3. If you are a seller on PayPal, all your transactions attract a certain minimum fee apart from the percentage of sales that you would have already agreed to pay to PayPal. That apart, individual rates for specific currency differs and you must understand the exact transaction fee that is levied on you. So if you are analyzing the means of earnings, these are all various sources that PayPal uses to make money.

f- The PayPal App

The mobile or digital payment is a big money spinner for PayPal.

About 30% of all PayPal transactions happen via mobile.

The scope of this can be well gauged by the fact that the company processes $8000 worth payment every second.

So you can quite imagine the PayPal founders looking to capitalize it better make money even faster.

Therefore, it is but obvious that they have been instrumental in developing several mobile apps like Venmo which are essentially made with the purpose to make and receive payment.

So these are the many alternative platforms that PayPal has been focusing on to make money.

How Do I Like PayPal?

I use PayPal for some of my small personal transactions but I don’t like it for the business at all.

The most important reason is that they charge a lot through the exchange rates.

They apply their own exchange rates to make a lot of money through the arbitrage.

They never answer to any questions regarding their extremely high exchange rates and it seems there is no regulation or third party supervision on this.

Above all, their support team looks arrogant sometimes and they ignore the clients questions and objections.

Maybe they think they can do this because they are so big and popular, but time is a good teacher.

When a new system comes that not only offers all the services that PayPal does while they make less money for themselves compared to PayPal, but also they work as user-centered company that put more value on their clients, then PayPal will understand what their mistake has been all these years, but it can be too late.

Exactly like taxi drivers who thought they were kings of the streets but now Uber has changed everything and has made many of them cry.

Paypal Is a Good SystemDespite the above two problems, PayPal is a good system.

So when you set out to find out how does PayPal make money, the short answer to it is in myriad ways.

An immensely popular online payment facilitator with close to 200 million active users and owner of one of the most visited websites in the world; they have leveraged their earnings on both the global necessities and individual requirements.

They make money essentially helping you undertake your needs in a hassle free and convenient manner.

It is needless to mention that their revenue model is a direct outcome of the internet boom.

So, no doubt, transaction fee remains one of the platforms for PayPal to make money.

Whether you are an online seller or average professional sending money to your family and friends, PayPal becomes the facilitator of convenience and comfort to you.

In return, they charge some fees for making these transactions possible.

Given that now the active PayPal users are on the verge of crossing the 200 million mark, even $1 charged annually would yield $2 million in revenues.

So PayPal is able to capitalize on this base to make money pretty swiftly.

Last but not the least, as you explore how PayPal makes money, you cannot ignore the contribution of online sales that is soon promising to take up a dominant position.

That along with the fact that PayPal is one of the few international operators to provide service in 26 currencies globally makes sure they always have myriad channels to make money.

So to find out how does PayPal make money, all you have to do is explore the range of offerings they provide and the current number of active users they have.

Rest as they say is history.

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