Biz Insider

How Does PayPal Make Money?

PayPal, a financial service company, is best known for allowing businesses and users to send and receive money online.

PayPal earns money through transactions fees, premium features for business accounts (in form of subscriptions), sale of card readers and business loans. Refer fees on cashback rewards, interchange fee, interest on cash and referral fees.

PayPal was established in October 2000 and has since grown to be one of the largest online payment facilitators. PayPal currently has more than 325 registered users. In 2020, more than $936 billion was transacted via its platforms.

What is PayPal and how does it work?

PayPal is a FinTech firm that facilitates money exchange across the internet. You can use PayPal to:

  • In exchange for goods or services, you can pay other businesses (both on the merchant side and within the platform).
  • Transfer money to family and friends
  • Transfer money to other accounts

PayPal is connected directly to the bank account or credit card account of the user. Money can then be retrieved or transferred.

Furthermore, the company enables Two-Factor-Authentication (via the mobile phone number), which adds a necessary layer of security.

PayPal offers many other features beyond these core features. You can pay with PayPal Credit or receive cashback from selected partner shops.

PayPal, on the other hand, works with all businesses and allows them to receive online payments. PayPal’s merchant services include direct checkout on merchant’s website, shipping discounts (through its partnership UPS), dispute management and fraud prevention, as well as business loans and loan approvals.

PayPal can be accessed through the company’s website, as well as its mobile or tablet apps (available for Android and iOS).

PayPal is available in more than 200 countries around the world. PayPal has more than 325 million users.

PayPal’s History

PayPal as we know it was created in October 2000 by the merger of Confinity and X.com.

Let’s take a look at the history of each company to understand how PayPal was created.

After finishing his Computer Science degree at the University of Illinois, Max Levchin, a Ukrainian-born man, moved to Paolo Alto in the summer of 1998. He had a clear goal: move to the Valley to start a business.

Levchin did not rent an apartment but instead chose to sleep on a friend’s couch. Luke Nosek (one of Levchin’s closest friends, but he didn’t stay at), had already founded a company.

Peter Thiel, an ex-derivatives trader who had just returned from San Francisco to invest in other startups, gave his first investment to the business. He also lectured at Stanford as a guest lecturer.

Nosek inspired Levchin, who attended one of Thiel’s guest lectures. After the lecture, he chatted with Levchin and they met for breakfast. Levchin presented his idea of a product which allowed users to store encrypted data on PDAs. This would allow them to create digital wallets.

They formed FieldLink in September 1998 with Nosek, Levchin’s friend and Ken Howery. FieldLink didn’t really take off, and Thiel and Levchin, who served as the firm’s CEO and CTO respectively, had to pivot.

Confinity was the new company name, which is a combination of confidence and infinity. The team decided to create a new product type and a new company name. Confinity will allow users to pay anyone using handheld devices, instead of encrypted information.

The team secured its first ever outside funding round from Nokia Ventures in July 1999. This was to continue pushing for the adoption of mobile devices. The team launched Confinity’s flagship product under the name PayPal to make it more attractive to the public.

Nokia Ventures used PayPal to transfer $3 million of funding at its launch party. This was a sign of the potential it would bring. PayPal made it easy to sign up. To remove any friction, you simply needed to register with a credit or debit card and choose a pin.

PayPal was finally opened to the public in October 1999, just a few months after its initial launch. By this time, thousands had signed up for PayPal. Luke Nosek devised a brilliant growth hack that would accelerate the startup’s growth.

The team offered $20 to sign up and $5 for referring anyone else. The team was forced to reduce the referral bonus to $5 after more than 100,000 people signed up in the first month.

PayPal was able to continue raising money for its user acquisition strategy because of the buzz it created early on. PayPal launched to the public in September 2009 and raised Series B funding of $23 million, and Series C funding of $100 million within nine months. PayPal used to pay $10 million per month to acquire customers at one time.

PayPal was able to finance its business through an avenue it had created, without having to rely on outside investors. While online marketplaces such as eBay were becoming more popular, they were not yet a convenient way to pay. Users were still using U.S. Mail or checks for payment.

Beenz and Flooz had tried to resolve this problem by creating their own ecurrency that could also be used online for payment. They failed to achieve critical mass and were eventually forced to close. People were more comfortable paying in dollars than they thought, and PayPal finally allowed them to do so.

PayPal wasn’t the only company competing for market share on eBay. PayPal’s most fierce rival was X.com. This startup was founded a few weeks after PayPal’s public launch. It is led by Elon Musk.

Musk was certainly not the one to back down. When it came to customer acquisition costs, his company always outspent PayPal. X.com copied many of the PayPal features, making matters worse.

PayPal and X.com spent excessive amounts to retain and acquire customers. The two companies soon realized they would be out of business if their spending continued at the same pace. Both companies decided to stop going down the road of destruction and join forces.

Confinity and X.com declared in March 2000 that they would merge to create one company, which would become PayPal. The new PayPal was quickly established and became the market leader in online payments. This allowed them to drastically reduce marketing spend.

Bill Harris, who was previously CEO at X.com, was appointed acting chief executive of PayPal. However, his tenure would last only a month. Musk would replace Harris, who in 2009 founded Personal Capital.

However, the company didn’t get the stability it desired from the new leadership. Musk was often seen shouting at employees and clashing with Confinity founders.

Musk’s desire for PayPal to switch from Unix to Microsoft Windows was a key point of contention. This suggestion didn’t go down well with Max Levchin. After a heated argument between the two, Musk decided to go on vacation in Australia.

He was on his way to vacation when he got a call from his board informing him of his immediate release. However, Musk wasn’t the only one to have problems with his new partners. “We were rivals, so that was awkward,” said Jeremy Stoppelman (an early employee at X.com, who’d go on the to create Yelp) in a 2007 interview.

“And that awkwardness became total dysfunction and warfare. Most X employees were fired or left. Culture was a contest of intellectual pissing, and some didn’t like it .”

Thiel was reappointed as acting CEO of the company following the leadership transition. Musk remained chairman of the Board of Directors. Musk remained PayPal’s largest stakeholder.

Thiel’s leadership was a loss and problems started to arise. Russian fraudsters were able, for example, to hack into PayPal’s system and steal millions of dollars by retrieving credit card information.

Even worse, eBay, the largest growth-accelerant of the company, attempted to take over PayPal’s turf by buying its competitors and favoring them in the marketplace. Finally, many customer complaints went unanswered, or in some cases were deleted right away.

PayPal had to raise more money in order to stay in business. In March 2001, it raised $90 million more equity (Series D), and filed to go public in Sept 2001. PayPal went public on February 15, 2002 after 11 revisions to the prospectus. This allowed PayPal to raise $70.2 million more.

However, life as a public company was not easy. eBay announced it would purchase PayPal in an all stock deal for $1.5 billion just five months after its IPO. PayPal was the facilitator of every 4 transaction on eBay at the time of acquisition.

eBay would be able to set the fees it charges sellers through this acquisition. They would also own the payment gateway for e-commerce, a highly-growth industry.

Further, the exit created a wealth of millionaires who would become known as the PayPal Mafia’. Elon Musk was the leader of this group, having made $165 million through eBay’s exit. He went on to create Space X and Tesla. Others include:

  • Peter Thiel became an early investor in companies such as Facebook , and Airbnb . He also co-founded Palantir Technologies which went public in July 2020.
  • Max Levchin founded Affirm, and led the company’s IPO in January 2021.
  • Jeremy Stoppelman was a Head Engineer at X.com and went on to create Yelp.
  • Reid Hoffman, former COO of PayPal, founded LinkedIn in 2002. The business was later sold to Microsoft for $26.6 million in December 2016.
  • Chad Hurley and Jawed Karim were engineers and designers at PayPal when they founded YouTube in 2005. The company was sold to Google in 2006 for $1.65 Billion.
  • Keith Rabois was previously PayPal’s Head of Business Development. He also held executive positions at Square (COO) and LinkedIn. He is currently the Managing Director at the Founders Fund.
  • Scott Banister, an ex-member of PayPal’s board, cofounded IronPort email service and was sold to Cisco in 2007 at $830 million.
  • David Sacks was also a PayPal COO. He launched Yammer in 2008, the first ever Enterprise Social Network. The business was then sold to Microsoft for $1.2billion four years later.

Luke Nosek and Roelof Botha are also notable members. Russel Simmons and Jason Portnoy are also noteworthy. The reason the PayPal Mafia gained worldwide fame was because its members continued to support each other by funding new business ideas. Max Levchin was, for example, the first to invest in Stoppelman’s Yelp.

Even after the acquisition, problems with business conduct continued to surface. was sued both by current shareholders and other businesses. AT&T claimed, for example, that PayPal and eBay copied one of its online payments patents without authorization.

PayPal’s rise continued over the next few decades under Scott Thompson, its new President. The company’s growth was accelerated by the announcement by eBay that PayPal would restrict its payment options to PayPal and ProPay (as an alternative to payment at pickup).

PayPal’s strategy in the 2000s was to expand its business into as many countries and regions as possible. To avoid allowing other competitors to establish a dominant position in their home markets, which could eventually make them a threat, PayPal did this.

PayPal was also one of the first to adopt the mobile wave simultaneously. In April 2010, PayPal launched its iPhone app. Its underlying infrastructure has also matured and reduced its vulnerability to attacks from outside.

Continuous product iterations also led to significant improvements in revenue and conversation rates. In 2011, PayPal’s Express Checkout feature was introduced. It was able increase merchant sales by more than 18 percent. In the same year, FinTech reached 100 million users.

The company’s growth was not halted by a change of leadership. In January 2012, President Scott Thompson resigned from PayPal to become Yahoo’s CEO. David Marcus had joined Yahoo’s ranks a year earlier.

Although PayPal is still the leader in online payments, Thompson’s life has not always been easy. PayPal was influenced by eBay’s corporate culture but had problems with bureaucracy, slow decision making, and slow decisions.

Sometimes, it would take 6 weeks to change things such as the wording of a page. To avoid being challenged by its leaders, the company would go so far as to not hire the most talented employees.

Marcus led PayPal back to its roots, adopting a more agile way of doing business. PayPal created a multitude of products and began buying other businesses. In 2013, it Venmo, a less-known payment app for $26.2 million. Venmo is one of America’s most popular peer-to-peer payments apps, processing millions of transactions each year.

PayPal had generated annual revenues of over $6.6 billion by the end 2013 – which represented 41 percent of eBay’s total revenue, and 36 percent its profits. This was not for everyone.

For the longest time, Carl Icahn, an activist investor, had pushed eBay for PayPal’s spin-off. “PayPal is a jewel and eBay covers up its value,” Icahn stated in an interview to Forbes. “If it were just that easy, you’d get a huge premium due to growth.”

Elon Musk supported the move and even came out to support it . He said that it “doesn’t make sense that an international payment system is a subsidiary auction website… It’s as though Target owned Visa or some other thing.”

The same conclusion was reached by eBay’s management. eBay declared that it would officially spin off PayPal in September 2014 to make it an independent company.

In July 2015, PayPal was officially spun off eBay and became a publicly traded company. This took less than one year. PayPal was already worth more than eBay at the time of its market debut and has not looked back since.

PayPal also made significant changes to its leadership team, in addition to the spinoff. Dan Schulman, who has held previous leadership positions at American Express and Virgin Mobile, amongst other companies, was appointed the company’s new CEO. He has been in that position since then.

The change was inevitable and necessary. Square, Apple and Google (via their Wallet apps) had made significant strides in mobile payments and posed a serious threat for PayPal’s bottom line. Startups like Adyen, Stripe and others were also gaining more traction in payment processing.

Schulman’s attention was on two strategic initiatives: signing partnerships and expanding PayPal’s reach through acquisitions. PayPal was able ink partnerships over 2 years with companies like Mastercard, Visa and Apple (via Android), Nintendo Switch, Samsung Pay and even China’s Baidu.

These partnerships enabled consumers to use their PayPal accounts to make in-app and in-store purchases. Schulman’s ability to make deals was evident in particular the Visa and Mastercard partnerships, which were announced within a matter of months (in 2016).

Before these announcements, PayPal was in a public dispute with Visa over its push to users to use their bank accounts to pay instead of using a Visa-powered card. These partnerships greatly boosted PayPal’s visibility and gave them a strong foothold within various ecosystems like Apple’s AppStore and Google’s Play Store.

Second, PayPal embarked on a broad-ranging acquisition spree. Its most prominent purchases include:

  • July 2015: $890 Million for Money Transfer Company Xoom
  • February 2017: $233 Million for TIO Networks, a bill payment management company
  • May 2018: $2.2 Billion for iZettle, a Sweden-based company
  • June 2018: Simility and Hyperwallet receive $120 million and $400 millions, respectively
  • November 2019: $4 Billion for the browser extension honey

The company is still under Schulman’s management and continues to be subject to scrutiny. There are numerous reports that PayPal has withheld multiple seller accounts from customers without providing any explanation.

PayPal employs close to 25,000 people today. It has more than 50 offices around the globe. PayPal’s diverse platforms were used to transact more $936 billion in 2020.

PayPal: How does it make money?

PayPal makes money through transactions fees, subscriptions to business accounts and the sale of card readers. It also offers business loans, referral fees for cashback, interchange fees, interest rates on cash, and by promoting shipping services.

For simplicity’s sake, this analysis only includes income from PayPal’s core platform. It is important to note that the revenue generated by its subsidiaries (such Venmo, Xoom or iZettle), makes up a substantial portion of its business.

Let’s look at the income streams of PayPal in the section below.

Consumer Account Fees

PayPal allows you to open a personal account for free. You can also send most payments at no cost. This includes:

  • Send money to friends and family
  • Receiving money from family or friends
  • Payments for goods and services
  • Transfer money to your bank account

However, PayPal charges users for sending and receiving payments. PayPal charges you for the following types payments:

  • You can send money to your family and friends with a debit card or credit card
  • International payments
  • For example, you can sell goods and services on platforms such as eBay
  • Transfers to your personal bank account instantly
  • Transfer money to a personal debit or credit card
  • Selling and buying cryptocurrencies
  • You can have a paper check mailed directly to you

provides a detailed overview of the fees. The fees vary from one country to the next.

The fees may not be applicable to all countries. As an example, the sale and purchase of cryptocurrency is only possible in certain countries at the time of writing.

Business Account (Fees).

Users can open business accounts in addition to personal accounts. This allows them to send and receive money online or in-store.

As the name implies, a business account allows companies to accept PayPal payments for goods and services.

Business accounts are similar to personal accounts. They can also be set up free of charge. Business owners can opt into Payments Pro if they require more advanced features.

Payments Pro can be purchased as a monthly subscription at $30 per month. Payment Pro features include a virtual terminal that can process Visa, Mastercard and American Express payments. There is also dedicated customer support.

Business owners pay a per transaction fee in addition to the subscription fee. provides a detailed description of merchant fees. Examples include:

  • For example, transaction fee is a payment of 2.9 percent plus a fixed fee for online sales or 2.7 percent for in-store purchases
  • International transactions incur an additional 1.5 percent surcharge
  • PayPal Here transaction fees (more details in the next chapter).
  • There are fees for debit and credit card payments
  • Businesses can make mass payments to multiple recipients (maximum 2%)
  • Micropayment fee equal to 5 percent plus a fixed fee
  • Transactions that are not processed through the buyer’s PayPal account, or through a guest (nonpaypal user) checkout will be subject to chargeback fees
  • Buyers who file a claim, or request a chargeback, will be charged a dispute fee
  • Currency conversion fees

You can also get many other features. Business account owners have the option to opt for additional premium features. These are also paid each month, along with a set-up fee, and per-transaction fees.

You can choose from account monitoring services (a $29.95 setup fee and $19.95 per monthly), advanced fraud management filters ($20/month and $0.05/transaction), and buyer authentication services ($10/month and $0.10/transaction).

The country of operation and the place from which the payment is made are both factors that affect business account fees.

Click Here to Pay with PayPal

PayPal Thispoint-of-sale system (POS) allows merchants to take in-store payments. Customers can pay with their debit or credit cards, as well as mobile wallets such as Apple Pay and Google Pay.

PayPal charges a transaction charge to accept in-store payments. It also makes money from the sale of its card readers. Prices range from $24.99 to $99.99.

Payflow

Paymentflow is a payment gateway that allows merchants and processors to connect their website to their merchant account and processing network.

Merchants pay a flat fee ($0.10 in the United States), as mentioned above. Merchants can opt into Payflow Pro for $25 per month if they need additional customization.

PayPal Working Capital

PayPal Working Capital allows owners of businesses to apply for loans from PayPal. This additional capital should be used to expand your business and improve its operations.

The maximum cash advance depends on many factors such as sales volume, account history (how often you claim), and whether PayPal Working Capital was used previously.

PayPal loans can be repaid per transaction, as opposed to traditional loans that charge monthly interest. PayPal loans are repaid per transaction. This means that each time you sell, a percentage is taken and used to repay your loan. PayPal makes income from the deducted fees.

Pay in 4

PayPal introduced installment payment plans in September 2020 (called Pay In 4). This allows users to pay their purchases, which range between $30 and $600 over six weeks in four installments.

PayPal’s Pay In 4 service allows it to compete with AfterPay (founded by Max Levchin), Affirm and Klarna among others.

PayPal currently generates revenue from delayed payments and fees it charges customers. It could charge merchants on a transaction- or monthly-basis in the future.

Cashback

PayPal declared August 2017 that it would offer a Mastercard-branded credit card and cashback rewards.

The card gives 2 percent back on all purchases, without any annual fees, no minimum redemption requirements, and no restrictions on how cash rewards can be used. There is no expiration date.

Cashback rewards can help companies make more money from every merchant they source. They can promote spending at certain partners and receive a percentage of the transaction volume.

Interchange fees

PayPal provides both a debit card and a credit card for consumers and businesses. These cards are offered in partnership with Mastercard, a payments provider.

An interchange fee is charged when you pay with your credit or debit card. The merchant pays interchange fees, which are usually less than 1%. If you purchase $100 worth of merchandise, $1 would be paid to Mastercard.

PayPal would receive a portion from that fee to promote the card to its customers. The exact percentage is not publically disclosed.

Cash Interest

You can open Cash Accounts which allow you to keep a balance and send and receive money.

PayPal uses the cash in those accounts just like any other bank to lend it to other institutions such as banks.

These institutions then pay them interest (also known as Net Interest Margin). According to Statista for 2019, the net interest margin of all U.S. banks was 3.35 percent.

Shipping Label

PayPal partners with UPS and the United States Postal Service to offer merchants shipping services.

Merchants may be eligible for shipping discounts, purchase and tracking of shipments.

Merchants will then have to pay a fee for shipping to the mentioned shipping companies. This service is free to use.

Although PayPal is free, PayPal will receive a small portion of the shipping fee from the logistics provider.

PayPal Funding, Valuation and Revenue

Crunchbase reports that PayPal raised $216 million in 6 rounds of venture capital funding. Another $70.2 million was raised by the company during its July 2015 IPO.

When eBay bought PayPal in 2001, its value was $1.5 billion. Since then, that valuation has risen steadily. PayPal is today valued at $277 billion. This makes it one of the most valuable companies in the world.

PayPal generated $21.4 billion in revenue for the fiscal year 2020. Over the same period, PayPal made a profit of $3.29 trillion.

PayPal: Who is the owner?

PayPal was no longer the majority shareholder when eBay spun off PayPal. eBay shareholders were rewarded with one PayPal share for each share they own in eBay.

PayPal was soon available for investment on the public markets. Over the years, PayPal’s ownership structure changed dramatically.

The Vanguard Group, which holds a 7.60% stake in PayPal, is currently the largest shareholder. BlackRock is the second largest shareholder at 4.46 percent, followed by Fidelity management with a 3.87% stake.

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