1. Why PayPal?

If you’ve ever purchased anything online, chances are you’re familiar with PayPal. PayPal is an online payment service that enables businesses of all sizes, as well as individuals, to accept bank or credit card payments for the items they sell. When a customer pays for his or her purchases, PayPal processes the payment and transfers the funds to the seller’s PayPal account. PayPal also offers a start-to-finish shopping cart and checkout system.

PayPal facilitates online payments for hundreds of thousands of Internet e-commerce ventures, as well as traditional brick-and-mortar businesses that have an online presence. Read on to learn why, for many sellers, PayPal is a necessary component of doing business online.

How PayPal Works

PayPal’s mission is to “build the Web’s most convenient, secure, cost-effective payment solution.” But what is it that PayPal does, exactly?

A Typical Transaction

Let’s take a look at a typical online transaction involving PayPal, as shown in Figure 1.1:

1. The transaction starts when a customer (let’s call her Mary Ann) goes to the website of an online clothing retailer. Mary Ann finds a sweater she wants to purchase and clicks the Buy button on the product page.

Figure 1.1. A typical PayPal transaction sequence.

At this point, PayPal steps in behind the scenes. The retailer has followed PayPal’s instructions and inserted the necessary HTML code onto the Buy button on the site’s pages. When Mary Ann clicks the Buy button, an electronic command is sent over the Web to PayPal. PayPal now takes command of the rest of the purchasing process.

Mary Ann can, if she chooses, resume shopping on the merchant’s website, but to keep this example simple, let’s say she chooses to finalize her purchase.

2. Mary Ann sees a shopping cart or checkout page. Depending on the type of PayPal service involved, she might see a shopping cart page at the merchant site, or one that appears integrated with the merchant website. In other instances, Mary Ann will see a shopping cart or checkout page hosted at the PayPal site (labeled with the merchant’s name).

In either case, the item that Mary Ann wants to purchase is listed, as well as other information such as price, shipping and handling charges, and applicable sales tax. (PayPal automatically fills in the shipping and handling charges as well as the sales tax based on the retailer’s prearranged instructions.)

3. Mary Ann concurs with the total amount listed on the checkout page, so she clicks the Pay Now button. This directs her to a payment page, again hosted by PayPal.

4. Mary Ann is now asked if she already has a PayPal account. If she does, Mary Ann can simply enter her user name and password, and the rest of her personal information—address, phone number, and so on—are retrieved from PayPal’s database and automatically entered onto the payment form. (And if Mary Ann doesn’t yet have a PayPal account, she can now create one, if she wishes.)

5. Let us say that Mary Ann doesn’t have a PayPal account—she is not forced to create one, she can simply pay using a credit or debit card. She enters her contact information and card information in the web form. Mary Ann then clicks the Pay button to authorize payment.

Behind the scenes, Mary Ann’s credit card information is transmitted to PayPal, which contacts the issuing bank for Mary Ann’s credit card. Assuming that Mary Ann’s credit line can cover the purchase, the issuing bank authorizes the transaction and the sale is charged—to PayPal.

6. Mary Ann is sees a confirmation page with a message (sent by PayPal) that says her purchase has been completed. Behind the scenes, the retailer is also notified by PayPal of the purchase, typically via an email message that includes information about the purchased item, as well as Mary Ann’s shipping information. At the same time, an electronic funds transfer is initiated from Mary Ann’s credit card company to PayPal; the funds don’t arrive immediately, but the transfer process is started.

Note what doesn’t happen at this point: Mary Ann’s credit card information is retained by PayPal, but not transmitted to the retailer. This keeps Mary Ann’s financial information secure, and helps to protect her credit card number from theft.

7. Once notified of the purchase, the retailer begins processing the order, and may send a confirmation email of its own to Mary Ann, letting her know that the purchase has been put into its system, and notifying her of the approximate ship date. The item purchased is pulled from inventory, packed, and sent to the designated shipping service.

8. For its part, PayPal now waits for the funds to be transferred from Mary Ann’s credit card account to its bank account. Once the funds are confirmed from the credit card company, the retailer’s account is credited that amount—minus applicable fees.

9. The retailer can now withdraw the funds from Mary Ann’s purchase. Some retailers withdraw all of their accrued funds at the end of the day or the end of the week; some withdraw funds as soon as they’re available. In any case, the retailer has the option of having PayPal send it a check, or of having the funds electronically transferred to the retailer’s bank account. It might take a week or more to cut and mail a check; an electronic funds transfer typically takes no more than two to three days. Or the funds can be left in the PayPal account for use in paying business expenses directly.

And, of course, Mary Ann receives (and loves) her sweater!

And that ends the transaction. PayPal received the purchase information from Mary Ann, transmitted the order to the retailer, received payment from Mary Ann’s credit card company, and then paid the retailer.

Who Pays the Fees?

It’s important to note that in the online payment process, the buyer pays no fees to PayPal. He or she (your customer) pays only the cost of the item purchased, plus applicable shipping and handling charges and sales tax, as determined by you, the merchant.

As the seller, on the other hand, you pay PayPal a percentage of the total transaction amount (2.2%–2.9%, depending on the seller’s monthly sales volume) plus $0.30 per transaction. PayPal pays you, the merchant, the total amount paid by the customer minus these transaction fees.

For example, let’s say that Mary Ann’s sweater cost $20, plus $5 shipping and handling. (We’ll assume that Mary Ann doesn’t have to pay sales tax, to simplify the example.) That’s a total of $25 that PayPal receives from Mary Ann.

However, PayPal doesn’t deposit $25 into the retailer’s PayPal account. First, it deducts 2.9% of the total (73 cents) plus an additional 30-cent transaction fee. So that’s $25 minus $0.73 minus $0.30, for a remainder of $23.97 that’s deposited into the retailer’s account. Put another way, the merchant paid $1.03 in fees to PayPal. (This is pretty close to what the merchant would pay a traditional credit card processing service, as you’ll learn later in the book.)

Why Use PayPal?

Whether you’re buying or selling online, PayPal offers some significant benefits. In fact, PayPal’s benefits to both customers and merchants are hard to beat.

Benefits for Consumers

PayPal’s primary benefit for consumers is that it enables them to pay for online purchases, even from smaller businesses, with a credit card. That’s a big deal; without PayPal, many online merchants wouldn’t be able to accept credit card payments, making it impossible for many potential customers to shop with them.

PayPal also offers consumers an unmatched level of convenience. PayPal users don’t have to enter their payment and shipping information every time they buy something online; they simply log in to their PayPal account and that information is accessed automatically when they’re ready to buy. It’s a faster checkout process, which customers like.

It’s also a more flexible checkout process, in that PayPal lets consumers choose from multiple payment methods from a single online wallet. They can store more than one credit card in a PayPal account, or opt for electronic withdrawal from a bank account, and then choose the preferred payment method when they check out from any given site.

Finally, PayPal’s Purchase Protection program and its arsenal of antifraud tools safeguard consumers from unauthorized transactions as well as purchases that go bad. And since PayPal handles all of their financial information, customers don’t have to worry about sharing that data with each and every e-commerce site. Their credit card numbers and bank account details are stored only with PayPal and are never shared with the merchants they buy from.

Bottom line, PayPal offers your customers availability, convenience, and security.

Benefits for Businesses

Likewise, PayPal’s value proposition for businesses is arguably unmatched when it comes to payment processing services.

Accepting Credit Card Payments

The most obvious benefit for many businesses is that PayPal lets even the smallest merchant accept customer payments via credit card. It goes without saying that without credit cards as a payment option, your business is dead in the water. PayPal lets you compete with big operations.

Shopping Cart and Checkout Systems

The advantage of having a ready-to-go checkout and back-end system goes without saying. It takes a lot of time and money to build your own online checkout system; many smaller and mid-sized merchants simply can’t do it. Again, this is where PayPal shines—you get a checkout system that looks like it’s part of your site, but actually is run by PayPal.

Convenience

The ability to accept credit payments and offer a ready-made checkout system speaks to another benefit—convenience. You don’t have to go to multiple suppliers to offer these features on your site; PayPal is a one-stop shop for all the payment functions you need. And, as you’ll learn throughout this book, PayPal makes it easy to set up any and all of these options; there’s not a lot of complicated programming necessary, even for some of the more sophisticated functions.

Ease of Registration

Speaking of easy, let’s talk for a moment about signing up for PayPal’s services—as compared to applying for a traditional merchant credit card account. PayPal’s registration for a business account is pretty much a one-page fill-in-the-blank process; upon approval, you’re up and running (and accepting credit card payments) in no time.

Contrast that with the process of applying for a merchant account with most credit card processors, which involves reams of forms, credit checks, and providing more information than most merchants are comfortable with. And, even after all this hassle, you might not qualify for an account—or qualify only at a higher rate. Many online ventures are simply too small to qualify for a merchant credit card account, period.

Security and Fraud Protection

You want to run your online business without fear of online fraud and theft. Once again, PayPal comes through, offering superb security and fraud protection for both consumers and merchants, including buyer address confirmation. Many accounts, especially those for smaller businesses, include a comprehensive seller protection program. You don’t have to worry about fraudulent transactions while using PayPal; PayPal is a strong line of defense for merchants of all sizes.

PCI Compliance

Have you ever heard of something called the Payment Card Industry Data Security Standard, or PCI DSS? It’s a set of requirements set forth to ensure that all companies that process, store, or transmit credit card data maintain a secure environment. Essentially, PCI DSS is a security standard designed to make sure that consumer credit card data is not compromised.

If you have a merchant credit card account, you’re required to become PCI compliant which includes completing an annual self assessment and quarterly system scans. Jumping through those hoops costs time and money. (You pay for the system scans.)

However, if you use PayPal solutions like Website Payments Standard or Express Checkout for all of your credit card processing, you don’t have to worry about complying with the PCI standard. That’s because you never see your customers’ credit card data; your customers transmit their credit card information directly to PayPal. So you don’t have to take the time or spend the money to become PCI compliant—and your customers are ensured a safer transaction experience.

(The exception to this is if you handle your own credit card data and use PayPal only for payment authorization via Website Payments Pro or Virtual Terminal. In this instance, you still need to ensure your own PCI compliance, as customers’ credit card data passes through your hands.)

Reduced Costs

Of particular importance to many businesses, PayPal may reduce your overall payment processing costs. Merchants that use PayPal find that they have fewer chargebacks, less fraud, and fewer customer complaints than they do with traditional credit card processing services.

For that matter, the whole PayPal checkout process tends to reduce a merchant’s customer service requirements; it’s an easier and less problematic process, as well as one that many customers are already familiar with. Put simply, PayPal takes a lot of the pain out of payment processing—for both customers and merchants.

Increased Legitimacy

It’s also worth noting that displaying the PayPal logo can add legitimacy to your online business—especially if you’re a newer or smaller business. You may not have the name recognition of larger online merchants, but with the PayPal logo displayed on your checkout pages, customers know they can trust you. And that may mean the difference between making or losing a sale.

Accept International Transactions

The more places you can sell your products and services, the more sales you’ll make. To that end, PayPal makes it easy for you to accept payments from international customers. (In fact, PayPal’s international payments are fairly transparent to the merchant.) If you can handle shipments outside the U.S., PayPal can handle non-U.S. payments in most major currencies—including currency conversion. It’s remarkably easy, and can significantly expand the scope of your business.

Increased Sales

Adding international sales can increase your sales, but that isn’t the only way PayPal works to expand your business. PayPal can bring you new customers and help you make more money from your existing customers.

Research shows that online merchants that offer PayPal as a payment option reach a wider audience than non-PayPal sites. A 2010 PayPal survey found that small- to medium-sized businesses that offered PayPal Express Checkout in addition to traditional credit card payments registered an 18 percent average increase in sales.* Over 80 percent of those merchants surveyed reported some sort of sales increase from the PayPal option, and the increase typically started within two months of implementation. The increase, by the way, was incremental, and did not take away from existing credit card volume.

* Independent survey by Ipsos Public Affairs of 805 PayPal Merchants, July 2010, where an average 18 percent increase in sales was reported since adding PayPal Express Checkout.

In addition, PayPal users tend to shop more frequently and spend more online than do non-PayPal users. Suffice it to say, when you tap into the PayPal user base, you’ll benefit.

Bottom line, implementing PayPal payments on your site can bring you new customers and increase the conversion from existing customers, driving incremental sales. You can’t ignore that.

More Satisfied Customers

Those new customers you get from PayPal, as well as your existing customers who pay via PayPal, are more satisfied customers. PayPal inspires customer confidence and is in fact easier to use than most other checkout systems, which means a more pleasant experience for your customers. Easier purchasing means more satisfied purchasers—which is always good for your bottom line.

Paying for PayPal

We’ve talked a little bit about fees throughout this chapter, but let’s explore that in more detail, beyond our typical example.

As noted previously, PayPal charges no fees to buyers; the merchant pays all the fees for a given transaction. There are two kinds of fees charged: a percentage of the total transaction amount and a fixed per-transaction fee.

As of March 2011 PayPal’s percentage transaction fees range from 2.2% to 2.9%, depending on your monthly sales volume. Add a flat $0.30 fee per transaction and you have the total fee.

Table 1.1 presents PayPal’s fee schedule as of May 2011 (subject to change, of course):

Table 1.1. PayPal Merchant Fees (U.S.)

PayPal’s transaction fees are based on the amount of money transferred. This point is important. PayPal charges fees based on the total amount of money paid, not on the selling price of the item. That means if a $10 item has a $5 shipping and handling cost, the customer pays a total of $15—and PayPal bases its fee on that $15 payment. So you need to factor your PayPal fees on the total of item price plus shipping and handling costs.

Finding Out More—and Getting Help—on the PayPal Site

This chapter only scratches the surface of what PayPal offers to online merchants. When you want to learn more, it’s best to go directly to www.paypal.com, PayPal’s website. Click the Business tab, shown in Figure 1.2, and you’ll see all sorts of links that will help you learn more about what PayPal is, how it works, and how it can help your business.

Figure 1.2. Learn more about PayPal’s business services online.

In addition, the PayPal site offers a robust help system for both consumers and merchants. Just click the Help link at the top of any page to browse a broad list of support topics, or use the Search box to look for answers to specific questions. You’ll also find a link to PayPal’s Community Help forum, where you can get assistance from other PayPal users, as well as a link to query an automated service rep online. There’s a lot of help available—if you need it!

The Bottom Line

PayPal is one of the world’s largest online payment services, providing credit card processing and other transaction services for individuals and businesses worldwide. Businesses use PayPal not only to process credit card payments, but also to provide the entire online transaction process, including shopping cart and checkout services. PayPal offers merchants a high level of service, as well as the possibility for increased sales, at competitive rates—and with fewer and simpler fees than typical traditional merchant credit card processing services.