Editor’s Note: This article contains updated information from a previously published story.
PayPal is a digital-payments platform that lets users engage in a range of financial activities, including transferring money and buying cryptocurrency. Some of its products and services may handle some of your banking needs, but there are limitations and tradeoffs to consider, and ultimately you may be better off with a full-service bank.
Account details and annual percentage yields (APYs) are accurate as of January 24, 2024.
What is PayPal?
Launched in 1998, PayPal was one of the first digital platforms to help people shop online and send money electronically. It’s now available in more than 200 countries and regions and can handle transactions in 25 currencies.
PayPal’s size and longevity make it one of the most well-known and trusted electronic payment services in the world. As of late 2022, PayPal had 432 million active consumer and merchant accounts, and its year-to-date payment volume was $337 billion.
Those impressive stats can give you the impression that PayPal is a bank, but it isn’t. Any money you keep in your account isn’t automatically insured by the Federal Deposit Insurance Corporation. But PayPal partners with banks for some of its products and services, so your funds may receive pass-through insurance from the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per account, per person.
How does PayPal work?
When you open a basic PayPal account, you can link it to your external bank accounts, credit cards and debit cards. Additional features are available if you open a PayPal Balance Account, credit card, credit line or sign up for “buy now, pay later” financing. Your payment options are stored in a central location called your account wallet.
When you’re at a point of sale (a cash register or a “buy now” button), check whether the merchant accepts PayPal. You can pay via PayPal in person using a QR code and online by logging into your account. You can also use PayPal to transfer money to and from merchants and people you know.
In every transaction, PayPal acts as an intermediary between your payment method and the other party, which keeps your details secure.
Can PayPal serve as a bank account?
Some of PayPal’s financial services and products may serve your banking needs, but there are some limitations.
What PayPal can do
You can use a basic PayPal account to shop online and in-store, send and receive money, pay bills, open a savings account and even manage cryptocurrency through the platform.
If you request a debit card, you can also withdraw cash from in-network ATMs, deposit checks and receive early direct deposits. The payment platform also partners with banks to offer credit cards and savings accounts. All of these options may be especially helpful to the 5.9 million households in the U.S. that are “unbanked.”
“Some people can’t get a checking or savings account at a bank or credit union because they have a ChexSystems record,” said Julie Everett, a CFP and senior financial coach at Financial Finesse. ChexSystems is a reporting tool that banks use to flag potential risky customers.
“If your account is closed by a bank for overdrafts, for example, you could expect to have a record that would make it difficult at other banks to open an account,” she said.
What PayPal can’t do
PayPal itself can’t cover your balances with FDIC insurance, which protects your bank deposits in the event of bank failure. If you want FDIC insurance for your PayPal balance, you’ll need to request a PayPal Debit Card. When you activate the card, your money will receive pass-through FDIC insurance, through Synchrony Bank, up to the applicable limits.
Additionally, not all people and merchants accept PayPal for payment.
“So it may be the same as having no money at all if you’re trying to do a transaction with someone who doesn’t use PayPal,” Everett said.
Banks and credit unions also typically provide mortgages, auto loans, investment services and in-person branches—things PayPal doesn’t currently offer.
Moreover, you may not have access to services you didn’t know you’d one day need.
“You may miss out on the benefits of having a large bank supporting you,” said Cyrus Purnell, a CFP and personal financial coach at Financial Finesse. “For instance, a bank is helpful if you need a cashier’s check for a large transaction.”
You may also run into some technology problems when using PayPal.
“I use it heavily and have experienced quite a few times where there is a glitch that won’t let me transfer the money to my bank,” Everett said.
Products and services PayPal offers
PayPal users can choose from several financing and banking options:
- PayPal Balance Account. This account works like a checking account. You can deposit checks, receive direct deposit, make electronic payments and use a connected debit card. There’s no monthly fee, no minimum balance and no credit check. Plus, your balance funds are eligible for FDIC pass-through insurance when you have the debit card. There is also PayPal Savings, which currently offers a robust 4.30% APY, well above what you’ll find at brick-and-mortar banks.
- PayPal Cashback Mastercard®*The information for the PayPal Cashback Mastercard® has been collected independently by Blueprint. The card details on this page have not been reviewed or provided by the card issuer.. This credit card pays 3% cash back when checking out with PayPal and 2% cash back on all other purchases. There are no category restrictions and no annual fee. PayPal’s other credit card, the PayPal Extras Mastercard, was discontinued.
- PayPal Prepaid Mastercard. Once you load money into your account, you can use this prepaid card to make purchases, pay bills and receive direct deposit. There’s even an option to set up an FDIC-insured savings account. Your prepaid balance can also receive FDIC insurance when you register the card. However, there are several fees to be aware of, including a monthly plan fee of $4.95.
- PayPal Credit. This reusable line of credit allows you to pay over time for purchases that cost over $99. You won’t owe interest if you repay the balance within six months and there’s no annual fee.
- Buy now, pay later. PayPal offers two “buy now, pay later” options. You can either choose Pay in 4, where you pay for a purchase in four installments, or Pay Monthly, where you set up a payment plan for up to 24 months. There are no fees with either plan, but you may pay interest on the monthly payment option.
Good alternatives to PayPal
You can use PayPal for some of your banking needs, but if its services fall short, here are some alternatives you can use in addition to or instead of it.
Traditional and online banks. If one bank spurred you as a customer, know that there are thousands more in the U.S. that may be happy to have you. Online banks in particular tend to offer fee-free accounts with high yields since they don’t have to cover the upfront costs of having physical branches.
Credit union: If you’re using PayPal because you’ve had a bad experience with a bank, consider opening a credit union account. These financial institutions are not-for-profit, so they tend to offer higher savings rates, lower fees on deposit accounts and more affordable loan terms compared to banks. You may also find checking accounts with no minimum balance requirements and no monthly fees. If the credit union is NCUA-insured, you’ll also get deposit insurance.
Second chance bank accounts: Some banks and credit unions offer “second-chance checking accounts” to people with blemished ChexSystems reports. These accounts typically come with lower monthly fees and minimum balance requirements.
Digital wallets. You can make accounts on other online platforms like Venmo, Google Pay, Apple Pay, and Samsung Pay. They can act as intermediaries, facilitating your transactions and protecting your information.
Frequently asked questions (FAQs)
PayPal is not considered a bank and does not receive FDIC insurance protection. However, you may receive FDIC insurance with some of PayPal’s products and services that are offered through partner banks.
PayPal is generally safe to use as a bank account, but your funds do not automatically receive FDIC insurance if you use a basic account. That means you could lose the money in your PayPal account if the company fails. However, some of PayPal’s products and services offer FDIC insurance through banks with which the company partners.
PayPal is considered a secure way to send and receive money. The platform offers several security features such as end-to-end encryption, two-factor authentication, email confirmations and fraud monitoring. Your financial details also won’t be shared with the recipient when you use PayPal to send a payment. Upguard, a risk management firm, gives PayPal a high security rating of A.
Yes, PayPal users can open a savings account with the company. There are no monthly fees or minimum balance requirements, and you’ll earn interest on your savings. Plus, your funds are protected with FDIC insurance through Synchrony Bank.
*The information for the PayPal Cashback Mastercard® has been collected independently by Blueprint.The card details on this page have not been reviewed or provided by the card issuer.
