General Question

robdamel's avatar

Is paypal a type of bank?

Asked by robdamel (786 points ) September 6th, 2011

When we put money into our paypal account, it is removed from our bank account. Through the internet we can see the balance of the money we have in our paypal account.

Now, does this mean that paypal has it’s own money vault? If not, where does our money go when removed from our bank account?

If it goes into the paypal’s bank account, then i would assume it works as a ‘pay me now, and i’ll pay you back later this same amount’. But then, wouldn’t paypal pay taxes on these funds that are transferred into their account?

But if this is not the case, then paypal is essentially an online bank, with all the same rights, correct?

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9 Answers

CaptainHarley's avatar

It’s all electronic. Electronic money, electronic transfers, etc. PayPal probably pays taxes on its profits, rather than on any balance it carries.

robdamel's avatar

@CaptainHarley I’m sure they pay taxes on their profits, but how does it manage the ‘balance(s)’ it carries?

After some research, I found the phrase “All the money held in PayPal accounts is placed into one or more bank accounts…” on this page: http://money.howstuffworks.com/paypal2.htm.

My question: In whose name are these bank accounts? Paypal’s? Or each individual client of paypal’s? If it’s in paypal’s name, wouldn’t these funds be liable to taxes?

robdamel's avatar

I also found this on wikipedia, although a bit more study will be necessary for me to fully comprehend it:

(http://en.wikipedia.org/wiki/PayPal#Business_today)

Peter Thiel, the founder of PayPal, has stated that PayPal is not a bank because it does not engage in fractional-reserve banking.[46] Rather, PayPal’s funds that have not been disbursed are kept in commercial interest-bearing checking accounts.[47]

In the United States, PayPal is licensed as a money transmitter on a state-by-state basis.[48] PayPal is not classified as a bank in the United States, though the company is subject to some of the rules and regulations governing the financial industry including Regulation E consumer protections and the USA PATRIOT Act

CaptainHarley's avatar

I would imagine that most of the money they hold for people goes into an interest-bearing account of some sort, or is invested, so that PayPay generates income for itself from that interest, thus: “PayPal‚Äôs funds that have not been disbursed are kept in commercial interest-bearing checking accounts.” They would pay taxes on any profit at the end of their fiscal year.

Judi's avatar

Paypal pays taxes on the interest it earns while it’s holding your money. Well, I haven’t seen their tax returns, most big corporations don’t pay taxes.
It’s still your money and they are holding it for you. It is not income to them. That would be like charging you sales tax for letting a friend park his car in your garage. it’s not your car, so you are not liable for the tax, even if it’s parked in your garage.

robdamel's avatar

@judi then they would be a bank (but they aren’t!), which is what confused me.

shirleylopez's avatar

@robdamel, with the research you made, it seems that PayPal is not a bank; it is merely a paying service provider and the reason they do this business is to profit from the unused money kept in their bank accounts. They are the one getting the interests from the bank accounts and not the PayPal members. I guess they do pay tax for their business operation.

robdamel's avatar

@shirleylopez Yes, apparently however, their business model of making money soley on interest was not working out, so they also make money by charging fees for larger transfers.

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