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Worthy Web Sites: PayPal

In all the fuss over the rise and (seeming) fall of commerce on the Internet over the last few years, I never saw significant movement toward micropayments, which many people (including myself and Jakob Nielsen) consider the necessary evolution of payment schemes on the Internet. The idea behind micropayments is simple: as a sustainable business model for Web content, imagine pages with interesting content costing one cent or less (so little that you pay attention only to the aggregate amount over a month, just as with your electric bill or telephone bill). Unfortunately, there remain a number of barriers to adoption of micropayments, not the least of which is a payment service that would accept and aggregate payments and disburse them appropriately.


Although it will undoubtedly be several years before micropayments have a chance (Jakob has been revising his predictions forward for some time now), we’re starting to see some payment services gaining the level of popular acceptance that would help make micropayments possible in the future. Based on sheer community size – which is all-important in person-to-person transaction situations like payment services – the leader seems to be PayPal.




Greenbacks Online — At its heart, PayPal is dead simple – it enables you to send or receive money via email. It’s quite a bit more complex behind the scenes, of course, but using email makes PayPal easy to understand.

PayPal offers three types of accounts, Personal, Premier, and Business. Personal accounts are completely free but are more limited than Premier and Business accounts, both of which offer additional features and charge small percentages for receiving money, mass payments, and daily payment sweeps from PayPal to your bank account. It’s easy to choose which account to use. If you’re an individual and aren’t participating in ecommerce on a regular basis, a Personal account is right for you. If ecommerce is the backbone of your business, you need either a Premier account (for individuals) or a Business account (for businesses).

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To send money, you must first sign up with PayPal, which is a simple process of filling in your name, email address, and retyping a set of graphically displayed numbers that help increase the security of the process (since a program couldn’t do it easily). You then receive email with a link to click to confirm your email address.

Next, you must link your account with a source of money, either a credit card or, for U.S. customers, a bank account. I suspect most people will enter their credit card number initially and give PayPal their bank account information only after they’ve become comfortable with the service (and I strongly recommend you read PayPal’s Terms of Use carefully so you understand the risks and how PayPal has addressed them, such as with a standard $100,000 insurance policy against unauthorized transactions, buyer and seller protections, and more). PayPal’s happy to work via credit cards, but only up to a point, since every credit card transaction costs them money – a small percentage of the overall transaction amount. That’s in large part why personal accounts are limited from receiving more than $100 per month in payments funded by credit card; you also can’t send more than $250 at a time until you’ve verified your account by linking it with a bank account.

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It’s easy in this age of Internet paranoia to see PayPal as encouraging you to enter your bank account to enable future shenanigans, and if you’re uncomfortable with doing so, there’s no need. If you assume that PayPal is a legitimate business at all (and if not, why work with them to begin with?), though, such concerns don’t hold water. PayPal isn’t alone in the payment processing field, and they have a tremendous vested interest in making their service as safe and reliable as possible – anything else is corporate suicide. When you link your PayPal account to your bank account, that increases the trust level of the entire system (that’s why PayPal refers to the linkage as "verifying" your account).

Misrepresenting identity is easy on the Internet, and stealing a credit card number isn’t all that difficult, but getting past PayPal’s bank account verification scheme would be hard. After you enter your bank account number, PayPal deposits two small amounts under a dollar into your account, and to verify your account, you have to find those amounts on your statement and enter them into PayPal’s secure verification page. If a miscreant had all the information necessary to spoof your account with PayPal, you’ve got bigger problems than just PayPal, so the likelihood that everyone is above board increases with the addition of verifiable information like the bank account (international users undergo a similar verification approach using the credit card statement).

Whether or not you go through the bank account verification procedure right away, once you’ve linked your PayPal account with a source of money, you can send money by filling out a simple Web form with the recipient’s email address, the amount, and a few other bits of information. One note: there’s a confusing pop-up menu asking what type of transaction you’re performing – avoid "Quasi-Cash" when using a credit card for the source of funds since it could result in cash advance fees. PayPal then acts as a trusted third party and transfers the money from your PayPal account (withdrawing from your credit card or bank account if necessary) and deposits it in the recipient’s account. If the recipient doesn’t yet have a PayPal account, they can either set one up (a viral marketing approach that’s worked well) or request that PayPal send them a check immediately. The person to whom you’ve sent money never knows any information about your bank account or credit card; they just know PayPal gave them some money and said it was from you.

To retrieve money from your PayPal account, you can either request a check, which take a few weeks to arrive, or, if you’ve linked in your bank account, have PayPal do an electronic funds transfer into your account, which happens immediately. Of course, you can also leave money in your PayPal account, at which point that money is used preferentially for money you send out. If you’re bothered about the loss of interest, you can sign up to have your PayPal balance invested in a money market fund that earns (at the moment) 5.2 percent interest.

The Check’s in the Email — PayPal doesn’t cut the mustard for micropayments, because the minimum charge for Premier and Business accounts to receive money is 30 cents for transactions under $15 (transactions over $15 incur a small percentage charge as well). But PayPal has been tremendously popular for online auctions, where it’s a lot easier and more reliable than sending checks around. Plus, it eliminates the age-old "you go first" problem of whether you should pay first or the seller should send the product first.

Where I find PayPal most compelling, though, are in small transactions among friends. How often have you gone out to dinner with friends and had to do complex mathematical calculations to determine what everyone owes, especially when some people declare they don’t have enough cash and borrow from others temporarily. With PayPal, instead of maintaining complex tabs with your friends ("You bought me lunch last Thursday, but I still owe you for the ball game the week before"), you can swap money back and forth in the exact amounts necessary. It’s also great for small transactions that would probably otherwise be lost in the noise, such as when I mailed a couple of old books to a colleague with whom I’d worked on them. Although he offered, I couldn’t in good conscience charge him for the books, which I’d gotten for free from the publisher, so he just paid for the shipping via PayPal.

The main downside of this use for PayPal is that you have to remember to go into the Web site and send the money (you can also bill someone via PayPal to remind them). A while back, PayPal had some Palm software so you could beam money from one Palm handheld to another. Unfortunately, although the thought of being able to beam money is tremendously compelling (imagine just walking up to a cash register and tapping a Beam button on your handheld to check out), it was apparently too difficult for PayPal to maintain the software. Now, if you want mobile access to PayPal, you’ll need a Web-enabled cell phone, which can access PayPal’s Web site.

Although I haven’t seen shareware authors using PayPal for shareware payments yet, I see no reason they couldn’t. PayPal has a Web Accept feature that lets you accept payments on your Web site, but it doesn’t seem particularly flexible or tailored to shareware the way services like Kagi are, though it does take a smaller percentage off the top. Nonetheless, if you run a business that needs to take payments online, it’s hard to beat PayPal’s simplicity, not to mention the large number of people who have PayPal accounts for online purchases.


Newly available on PayPal is support for payments between people in different countries. As of 10-Nov-00, people in 26 countries (see the link below for a list) can now sign up for PayPal and send money back and forth with other PayPal users, no matter where they are. Needless to say, due to the increased costs of converting between currencies and other aspects of moving money around the world, sending money from a credit card or withdrawing money from PayPal to a credit card (only Visa at the moment) incurs a 2.6 percent plus 30 cent charge. For frequent use, it probably makes sense to keep a fairly high balance in your PayPal account to avoid the credit card charges. Enough of the details are slightly different for international users that it’s well worth reading through PayPal’s International Account Help Center.

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The First One’s Free — In the past, PayPal has worked hard to sign up new users by paying $5 referral fees. Those are still available, but only if the referring account is a Premier or Business account, and only if the new user performs a slew of actions, including verifying a bank account, depositing $100 into PayPal via electronic funds transfer, and signing up for the money market account. Similarly, though I haven’t been paying close attention the entire time, my impression is that PayPal has begun instituting more fees and generally trying to move from a community building approach to turning a profit. I’m sure PayPal was burning through venture capital, and in today’s business environment, such tactics don’t fly for long.

I have no inside information regarding the health of PayPal’s business, and I wouldn’t leave thousands of dollars in my PayPal account, but I would encourage you to check out PayPal’s service. Sending small amounts of money around the Internet via PayPal is so much easier than relying on the more cumbersome approaches of yesteryear. Advances like these are, in my opinion, well worth embracing because they have the capacity to change our lives in small but important ways. My experience is that it’s a bit tough to use PayPal the first few times, but after that, it becomes almost second nature. I even have friends who have started using it as a verb, as in "Shoot, I forgot my wallet. Can you pay for the groceries and I’ll paypal it back to you when we get home?"

I’ve set up a TidBITS PayPal account (using our main public email address of <[email protected]>), so if you’re interested in trying out PayPal, you can use the link below so we receive the $5 referral fee, should you manage to jump through all of their hoops. And I plan to keep a close eye on PayPal to see if they ever change things so they could be used effectively for micropayments.


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