Using PayPal for Your Online Business – Advantages and Disadvantages

A merger between X.Com and Confinity in March 2000 gave birth to PayPal as we know it today. Based in the United States of America, it is a global e-commerce business which allows for money transfers and payments to be made through the internet. Basically, it serves as an acquirer (an institution to process debit and credit card payments for services and products) and processes payments for online vendors, auction sites and for many other commercial users for a small usage fee.

The fee it charges usually depends on the payment options that are utilized, the currencies in question, the amount of money in the transaction and the country involved. In Oct 2002, PayPal, which had focused on expanding its services among eBay users, was acquired by eBay for just under $1.5 billion.

Is it an Online Bank?

Though it seems to offer all the services of a bank, PayPal is not a bank. Though the company is subject to many of the rules and regulations which govern financial institutions in USA, it has not been classified as a bank. Every bank engages in what is called as fractional-reserve banking wherein they maintain only a fraction of the deposits made by customers. The rest is lent out. PayPal, on the other hand, has all its deposits in commercial interest-bearing checking accounts and does not disburse any of it. However, PayPal in Europe, has been regulated just like a bank by the CSSF (Commission de Surveillance du Secteur Financier) and it offers service through the European Union.


A working knowledge of the features and services provided by PayPal is a must to appreciate the advantages and disadvantages of this system of financial transactions.

  1. With more than 232 million accounts registered, PayPal permits the customers to send, hold and receive funds in 24 currencies worldwide in 190 markets.
  2. In 2009, PayPal launched a Students’ Account for teens stating its aim to provide tools to teens for educating them on spending money wisely. Parents can set up this account and transfer money into it, giving their teens a debit card.
  3. PayPal makes it possible even for individuals to begin commerce and businesses with worldwide reach, playing as a third party for secure and easy transactions.
  4. It provides all its merchants with the flaws in their webstores so that they are better protected against malicious shoppers who attempt to shop for free from their stores.

The Advantages

The popularity of PayPal has largely been due to the ease and security that it provides. It has grown into a company with excess of $2.2 billion in annual sales revenues. There are many advantages of using PayPal for both, the seller and the customer. They are listed below.

instantShift - Advantages of using PayPal

1. Ease of set up:

The easy set-up and customization options that PayPal provides are really elegant. The price options for the vendors are fully customizable, the ‘add cart’ and ‘view cart’ options and buttons are available and they can also be made by the user. These customization options require nothing more than a simple copy and paste of existing codes. Within minutes, one could be up and selling online, worldwide!

2. Brand name and recognition:

Customers are still hesitant when it comes to payment over the internet because they are not able to ‘see’ their cash moving and being accepted. The brand name that PayPal has boosts customer confidence. Also, PayPal ensures that the webstore and vendor never get the credit card and bank account details of the customer. This adds to the trust.

3. Pricing policy

Most of the internet payment services sustain themselves through monthly or regular payments by the customers. In PayPal, you pay only when you sell. In this way, you are protected against the risk of having to pay service fees though you are not having sales. It is almost as if PayPal is you pal in good times and not-so-good times!

4. Huge potential customer base:

To state it in simple terms, when you make use of PayPal, every user on the internet becomes a potential customer. Every buyer is being targeted irrespective of whether he/she wants to use PayPal or the credit card. The provision of an alternate method of payment makes it flexible and attractive for the buyers.

5. Ease of execution:

For small time vendors and businesses, PayPal is a real godsend. Integrating a payment gateway to be able to conduct business online is an expensive proposal and does not make financial sense to small businesses. What is the use of going online to earn more money if the payment gateway itself becomes such a costly affair? PayPal does not need much investment in terms of time, energy and money and it can facilitate easy financial transactions. There are no setup fees or monthly fees too.

6. Multiple account options:

Depending on what you would like to use an account for, you can choose between a personal account, a student account or a business account. A single person can also own multiple accounts in multiple categories. Each of these accounts carry different privileges and have different rules. A personal account for instance has no transaction fees when it comes to transferring money between PayPal users.

7. Ability to accept international payments and cards:

As stated earlier, PayPal gives you the option of paying and accepting payment in 23 currency types. International payments often incur the currency conversion charges. For amounts up to $100,000, PayPal charges only a nominal 3.9 percent along with a small fee which varies according to the country. The ability to accept and pay through credit cards and debit cards is also a great feature. Payments from one business account or premier account to another is completely free. The fee for transacting through credit and debit cards is also a nominal 3.9 percent.

8. Keeping track of transactions:

PayPal will also double up as your sincere and honest accountant. You can access every inbound and outbound transaction with the click of a mouse. The account has been neatly organized into payments received, payments made, history and recent activity tabs which are very useful. You could select time periods of interest and download complete spreadsheet files which give you details of all transactions. If you want, you can even download more than a year’s worth of data and information.

9. Integrating payments with eBay:

This is a natural advantage that could be expected since PayPal has been acquired by eBay. Business and Premier accounts offer many tools for better integration with eBay. Thus, buying and selling on this giant site becomes much easier. There is also news that eBay will transact only through PayPal. In such a situation, PayPal becomes the only way to pay. PayPal also provides for better merchant services too.


Like every coin having two sides, PayPal has its own set of disadvantages. These demerits do merit attention as some of them are real serious problems for some kinds of businesses. The demerits of PayPal are listed below.

instantShift - Disadvantages of using PayPal

1. The hidden fees:

PayPal offers many services for free and others for nominal fees. The fees charged on non-PayPal payments could turn out to be very expensive. Personal account holders have no transaction fees while making or receiving payments from other accounts but they have limits and restrictions on the amount of money being moved. While this restriction does not exist for business and premier accounts, they are charged transaction fees (about 1.9-2.9 percent plus $0.30 per transaction). This becomes a big burden for small sellers on eBay and the likes. A huge percentage of the transaction is taken by PayPal. This is really difficult to understand when PayPal claims to help the small sellers.

2. Strict rules and locked accounts:

Due to security threat and issues of terrorist attacks, the US government has strict rules that restrict the number of transactions through PayPal. Thus, even the slightest suspicion leads to the locking of the account. It takes quite a long time for PayPal to do its investigation and give a clean chit to the account. Money could thus get locked in or held up for long periods.

3. Bad customer service:

Adding to the pain of a locked account and extra strict policy is the problem with a very difficult service. There are no numbers easily available on the website and even when you find the numbers, there seems to be nobody at the other end of the line. There have been complaints of emails receiving only automated responses. Even when one manages to get representatives on the line, they are not of much help as they state that the problems are totally out of their control. There are also reports of bank accounts being automatically debited without the knowledge of the account holder and there is no way to rectify the same.

4. Lack of third party arbitration:

You get stuck with strict rules and frustrated with the customer service. When you decide on an arbitration, you are again in for greater frustration. The account gets frozen and PayPal policies give it complete control over your funds for as long as the arbitration goes on. And there is no scope for outside arbitration. So, all that a troubled customer can do is to wait and wait. The ‘investigation’ goes on and there is no documentation that is provided to the user.

5. Painful verification process:

While the setup is easy, getting the account functional can be a hassle. You have to provide your account number and routing number. PayPal then makes token deposits which you have to wait for 5 days to arrive in your account. This has to be filled into your PayPal account to activate it. If you do not have the facility for internet banking then the problem only gets compounded. You may have to wait weeks to get your statement in the mail.

6. Movement into third party website:

Though it is partly offset by brand name and image, the fact of moving out of the main website to complete the financial transaction may not be good for well established websites. Even though some amount of styling and customization is available, the payment gateway will never resemble the original site. This will be a problem for brand conscious sellers.

7. Bad seller protection:

PayPal is highly vulnerable to fraud and if you happen to be an unfortunate victim, you really are in for bad news. As mentioned earlier, the slightest hint of suspicion locks away any PayPal user. Due to this, many times the funds are refunded to the customer even after the items have been shipped! This could prove disastrous for the seller. The complaint system is also bad which does not seem to redress any issues.

8. Scripts:

Downloading e-books and other digital products require the usage of a script. Setting up and using these scripts, even if it is only copy and paste, is not exactly everyone’s cup of tea. It could get confusing and messy.

9. Currency basket not comprehensive enough:

Though PayPal provides 23 currency types for payment, it excludes some important currencies. The Indian Rupee is an example. India is a growing economy and a fertile market. But customers there find it difficult to pay.


It is obvious that PayPal is not the solution for all buyers and sellers. It could be a good option for any buyer but a seller ought to be sure of the requirements and needs. Using it for very small businesses could end up in making them pay much more than reap benefits. At the same time, large businesses that build and sell brands would not prefer PayPal due to lack of complete customization and absence of brand-building features. PayPal is best suited for medium sized businesses. As for the buyers, this is a good option to complete online shopping and auctions.

Image Credits

Like the article? Share it.

LinkedIn Pinterest


  1. The sheer number of people using Paypal means it shouldn’t be ignored by any online business. However, there are a ton of people that will not use it at all due to a past experience or something else they don’t like about it. Websites should at a minimum accept Paypal and accept credit cards through a merchant account or other non-Paypal and no-registration service. This will cover 99% of buyers. Additional services like Google Checkout or Amazon Payments can help sales a little but they’re pretty much negligible as long as credit cards and Paypal is covered.

  2. I have been using PayPal from last 6-7 years and use it very frequently but I can’t say I am 100% satisfied with them. I had my fair share of disappointments.

    But that fact I am still using PayPal is that everybody is using it for payments. So we had to use it too. Almost all clients of mine want to pay with PayPal and almost everyone want to get paid on PayPal.

  3. yes, you are right, verification process is difficult

  4. Well I agree with you guys on this.
    Every business have their advantages and disadvantages. So ultimately it depends on how you want to use some services and how you limit.

    I do not use PayPal for larger transactions and keep withdrawing my balance on regular bases. So far so good. :)

  5. We use a CC processor and PayPal. We get 10 times the fraudulent payments via the CC processor than from PayPal buyers. Probably because it’s much easier and less risky to get a CC number than to hack paypal accounts.

  6. I think Paypal is a great choice for a self employed individual to collect online payments from customers. You have to make sure you quickly move balances out of your Paypal account though. If they freeze your account you don’t want to be stuck with thousands of dollars in there.

  7. Nice info, it’s always in best interest if we know what we are dealing with.
    Thanks guys.

  8. I think paypal is ok to use if you are just starting out, but a dedicated payment processor is better in the long run.

  9. The thing about paypal is that they are reliable if you are not holding too much money into this account. I prefer using two paypal accounts at the same time. I haven’t had any problems but it’s better to play safe than sorry.
    One of my friends paypal account for business got suspended because of fraud. He was selling SEO services and people where using fraudulent paypal account to pay and that’s why his account got suspend. There is no sense for doing it, but he had good amount of cash in this account so it made a good profit for PayPal.

  10. paypal cannot be ignored. simple as that. a client of mine ignored paypal, and went for only a local payment gateway. after a year, added paypal and sales went up by 30%.

    true story

  11. Hi Alia! The way that you have explained about the advantages and disadvantages of using the PayPal for online business is very impressive. Many business people think only about the advantages. It gives some clear idea about the disadvantages also. Nice post. Keep updating.

  12. I think PayPal is great. I own a small blog in which I sell crafts that I have hand made and it has brought in a lot of business and sales to me. I also love the fact that PayPal can also be used a bank account and are allowed to make purchases else where when needed. You don’t pay for PayPal either until a sale is breached. I haven’t applied for the debit card yet, but it is something I may be considering.I feel like it will be beneficial especially since I constantly earning morning online through it. It will save me the steps from having to transfer the money into the bank that I am already having issues with it !

  13. We’s have been using paypal for over 5 years now. Beside the fees there are not much to complain about. In Hong Kong there are just no other alternative. The one from China (alipay) is 100 times worse. The only way to add money to alipay is through direct deposit from a bank, which is quite a pain

  14. As a business owner, it is your responsibility to make sure your customers receive the best products/service from your company. But equally important is to provide a safe and secure way for them to purchase your product online. That’s why so many companies rely on Paypal as their payment processor, due to its simplicity and conveniency.

    But your business to customer relationship doesn’t have to end there. You can still continue to maintain and even further their interest in your company by means of email marketing. While email marketing traditionally sends out promotions/weekly sales/newsletters/ etc., to your entire customer base, you can now segment your contact list to send specific emails to just your Paypal users. It’s a great way to create specific content for them and give them special perks just for using Paypal.

    And what other great way for them to feel special and inclined to continue doing business with you than with special email campaigns just for them? ☺

  15. PayPal is so controversial and I heard so many stories about it. The poor service that they provide makes me think why is it so popular? It is good because everybody uses it, and if you want to be in the game you just have to obey the rules. So, everybody uses it, just because everybody else does :) A chance of loosing your money or getting no support when you need it, and paying ridiculous exchange and transfer rates does not seem to stop people, and I really do not get it. Especially when there are many alternatives like Tranfergo, Paysera, Payza and others. It would be great to see a detailed comparison of PayPal and alternative payment gateways for online businesses.

Leave a Comment Yourself

Your email address will not be published. Required fields are marked *