Advantages & Disadvantages of Using PayPal

By Kristie Sweet

PayPal can make online shopping faster and easier.
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In 1999, a small company named Confinity established a system to allow people to send and receive payments online. Two years later, the company's name changed to PayPal. In 2002, the auction giant eBay purchased PayPal, and the electronic payment company's reputation was born. As of late 2012, more than 117 million accounts make up PayPal, but there are both advantages and disadvantages in using the service either as a buyer or seller.

Advantages for Buyers

Since PayPal accounts connect directly to a bank account, buyers can pay for online purchases even if they do not own a credit card. Using PayPal may increase financial security for buyers since the seller does not receive bank account or credit card numbers, only the PayPal account number. Buyers can also use accounts to purchase items of differing currencies, so international purchasing is easier. The fact that PayPal is free is also appealing to many buyers.

Advantages for Sellers

Since buyers can pay for merchandise immediately, sellers receive payments immediately without having to wait for checks to go through the mail or clear the bank. Individual sellers can accept credit card payments without having to pay the fees credit card processors charge, and merchants may find PayPal's fees lower than other processors. PayPal offers a seller protection policy as well that may cover losses for products lost or damaged in shipment or from a chargeback.

Disadvantages: Freezing Accounts

PayPal may limit the amount of money you can send, receive or withdraw from your PayPal account if they believe you are breaking the terms of service. This means you cannot sell prescription drugs or firearms using PayPal, for instance. If you have what administrators consider a high number of chargebacks and customer complaints as a seller, they may limit your account. General "suspicious activity" may also generate a hold or limit on your PayPal account.

Disadvantages for eBay Sellers

Although the transfer of funds within PayPal is fast, you may not have immediate access to those funds, particularly if you sell merchandise on eBay using PayPal. PayPal may hold payments for 21 days in case there is a problem with your transaction. Sellers who have not had much activity, have a history of chargebacks or who sell certain kinds of materials such as electronics, gift cards and event tickets may be prone to being put on such an administrative hold. This delay tends to negate the speed benefit of using PayPal.