PayPal: how it works, what it offers and how you are protected

PayPal is an online payments system used by many eCommerce websites as well as sellers operating on eBay, and it is one of the brands the Financial Ombudsman Service lists among electronic money services, alongside Revolut, Tide and Skrill¹. It is not a bank in the everyday sense: it is an e-money platform, treated differently from a high street bank². That single fact shapes most of what follows, because it decides what happens to money held in a PayPal balance if something goes wrong.

People use it heavily. In a survey for the Financial Conduct Authority's Consumer Panel, 50% of respondents had used PayPal in the last 12 months, and 62% had used a non-traditional payment method, driven mainly by PayPal and mobile payments². PayPal is typically used by 14% of people for purchases online².

What PayPal offers has widened well beyond sending money to a seller. It now includes credit, debit and credit cards, buy now pay later, a rewards scheme and business tools. Each of those carries its own rules, its own protections and its own gaps.

What PayPal is and what it offers

PayPal began as a way to pay online without handing card details to every shop, and that is still its core. A small payment is sometimes made to or from an account as part of the registration process, which is why a PayPal reference can appear on a bank statement the account holder does not recognise⁶. When a transaction is billed through PayPal, it may show on a statement as PP* followed by the retailer's name⁷.

The brand now spans several product types. It offers lending products and buy now pay later products, a combination it shares with Klarna⁸. It issues its own debit and credit cards, both Mastercard³. It runs a rewards scheme, PayPal+, which is free to join and can be activated in the app³. It owns Venmo, an e-wallet app available on iOS and Android that only allows US bank accounts to be linked⁹. Its UK register entry lists trading names including Zettle by PayPal, Xoom a PayPal Service, Hyperwallet a PayPal Service and Braintree a PayPal service¹⁰.

For a consumer, the practical split is between money sent, money borrowed, and money spent on a card. Each behaves differently when a purchase goes wrong.

Sending and receiving money

Sending an individual payment carries no fee¹¹. That is the version most people meet first: splitting a bill, paying a friend, sending money to a seller who accepts PayPal.

The distinction that matters is between paying for goods and services and paying friends and family. Some sellers ask buyers to use PayPal and select friends and family to avoid PayPal charges, but there is no payment protection if that route is used¹². The saving on the seller's side is bought with the buyer's protection, and once the payment is made on that basis there is no route back through PayPal's dispute process.

For purchases, PayPal has a buyer protection scheme if an item is not delivered or not as described⁴. That scheme is the main thing standing between a buyer and a seller who takes the money and disappears, and it is worth understanding its edges before relying on it.

PayPal Credit and buy now pay later

PayPal Credit is a borrowing product, and PayPal sits among the UK's main three buy now pay later firms alongside Klarna and Clearpay⁸. It offers both lending products and buy now pay later products⁸. New rules for buy now pay later schemes are due to protect shoppers from 2026, which will change how these products are regulated¹³.

On credit checks, most of the big providers, including Klarna, PayPal and Zilch, only run soft credit checks¹³. A soft check does not leave the mark on a file that a full application does. Missing a repayment is a different matter: PayPal says credit records may be affected⁵. PayPal reports to TransUnion only, not to Experian or Equifax¹⁴.

PayPal does not charge late fees on agreements made after 30 September 2021⁵. That removes one cost that other lenders add, but it does not remove the credit record consequence of a missed payment.

If PayPal Credit is used, a virtual or physical card can be applied for that lets the credit be spent in-store rather than only online³. That card is issued by Mastercard³.

The PayPal debit and credit cards

PayPal issues both a debit card and a credit card, and both are Mastercard³. The credit card is available to PayPal Credit users, as a virtual or physical card for in-store spending³.

Payments made with the PayPal debit or credit card, online or in-store, are also covered by chargeback³. That is a meaningful difference from paying through PayPal with someone else's card, where the card issuer may step back. Where a Barclays debit card has been linked to PayPal to make a purchase, Barclays directs customers to contact PayPal directly for details of its support service¹⁵. Chase lists PayPal alongside Apple Pay and Google Pay as a way to make payments online¹⁶.

Eligible purchases made online using the PayPal debit card or credit card, bank account or PayPal balance are protected by Buyer Protection, but in-store purchases are not³. So the card gives chargeback in shops, while Buyer Protection covers the online side.

PayPal+ rewards

PayPal+ is free to join and can be activated in the app³. Points are earned on spending through PayPal using a balance, PayPal Credit, Pay in 3 or a linked card, and points convert to a cash value³.

There are three tiers based on points collected: Blue from 0 to 24,999 points, Gold from 25,000 to 49,999 points, and Black from 50,000 points and above³. The earning rate can rise on selected purchases at the Gold or Black tiers, so the value of a point depends on how much is put through PayPal and at which tier³. The current conversion rate and the current earning rate are set out on PayPal's own site.

A year is allowed to qualify for the next tier before points reset, and once a tier is reached, access to it lasts until the end of the next calendar year³.

How charges work

PayPal's charges fall into a few buckets, and the amounts change, so the figures to check are always the ones on PayPal's own site on the day.

For business sellers, PayPal charges a percentage of each transaction, and the rate depends on sales volume and on the type of transaction, which is why PayPal publishes a range rather than a single number¹⁷. For individuals, sending an individual payment carries no fee¹¹. The fee structure for goods and services payments sits with the seller rather than the buyer, which is why some sellers push buyers towards friends and family.

On credit, PayPal does not charge late fees on agreements made after 30 September 2021⁵. On rewards, joining PayPal+ costs nothing³.

How to contact PayPal and complain

PayPal has its own dispute resolution process, which may assist in getting a problem resolved¹⁸. For a purchase that did not arrive or was not as described, a dispute can be opened under its Buyer Protection scheme online or via its app¹⁹.

If the dispute process does not settle things, PayPal is covered by the Financial Ombudsman Service like any other financial organisation in the UK². The ombudsman is free to use and looks at complaints about electronic money services including PayPal, Revolut, Tide and Skrill¹.

For suspicious emails, forward them to phishing@paypal.com and report@phishing.gov.uk²⁰. Requests can be viewed by logging into the account and selecting Activity, where a fraudulent request can be cancelled, and the password and security questions changed if the account is suspected of being compromised²⁰.

How you are protected, and where that stops

This is the section that matters most, because PayPal's protection is real but narrower than a bank's.

No FSCS protection. PayPal has no FSCS protection². Money sitting in a PayPal balance does not carry the safety net that applies to money in a bank or building society, and PayPal balances are counted alongside bank and building society money under the capital rules for means-tested benefits²¹. If PayPal failed, there is no deposit guarantee behind the balance.

Buyer Protection. It covers eligible purchases made online using the PayPal debit card or credit card, bank account or PayPal balance, and not in-store purchases³. If a scammer took payment for an item through PayPal but failed to send it, the purchase should be covered, though there are exceptions and time limits on lodging a claim²². Where payment was made via PayPal, Buyer's Protection allows a refund to be requested²³.

Where Buyer Protection does not reach. If a scammer used fake PayPal payment pages to gather bank details, PayPal is not part of the transaction, so money cannot be claimed back via PayPal Buyer Protection¹¹. Sellers who did not post an item to the account holder's registered address lose seller protection¹¹. A transfer to another account that turns out to be a scam is not always covered by PayPal Buyer Protection².

Section 75 and chargeback. Paying through intermediaries such as PayPal can break the chain for Section 75 purposes²⁴. Section 75 protection often does not apply when a credit card is used via PayPal⁴. Where a debit or credit card was used to service an online payment method such as PayPal, it is unlikely the Consumer Credit Act 1974 or the chargeback scheme can be used to claim from the card provider¹⁸. PayPal's own Buyer Protection scheme can award refunds in similar circumstances, which is the trade-off²⁵.

Hacked accounts. If a PayPal account is hacked and money is stolen, there is an entitlement to a full refund of any losses from the PayPal account, and customers are not liable for unauthorised purchases².

The ombudsman. PayPal is covered by the Financial Ombudsman Service like any other financial organisation in the UK². That is the backstop when a dispute is not resolved internally.

Scams that use PayPal's name

PayPal's brand is heavily imitated, and the scams are specific enough to describe.

In the 1p deposit scam, the scammer deposits 1p into a PayPal account, which triggers a genuine email from PayPal about the deposit, followed by a scammer phone call⁹. Some recipients warned on social media that their PayPal accounts had been hacked after receiving emails like this, and others were asked to download remote software onto their device after calling the number⁹. PayPal said it is aware of the scam and that the phone number is not associated with PayPal⁹. The advice is not to call the number or reply to the email, but to log into the PayPal account and make sure the password is updated and two-factor authentication is enabled where possible⁹.

In the money request scam, scammers exploit PayPal's request money feature to scare people into calling a dodgy phone number and giving away personal details²⁰. A fraudulent request can be cancelled from the Activity section of the account²⁰.

More broadly, using a digital wallet such as Apple Pay, Google Pay, PayPal or Samsung Pay ensures card details stay private²⁶. When paying online, using a debit or credit card, or a payment service that offers buyer protection such as PayPal Goods and Services, is the safer route²⁷. Secure payment methods where possible, such as PayPal for buying goods, and debit and credit cards, can offer more protection than a bank transfer²⁸. Paying by credit card above £100, debit card or PayPal gives more protection than a bank transfer²⁹.

What happens to your account if you die

PayPal will only take instructions from the executor of the estate, and can send a cheque in the name of the deceased account holder or transfer to the linked bank account³⁰. That is a narrower process than a bank's, and it means the executor needs to be identified before anything moves.

How it differs across the UK nations

PayPal's own terms do not vary by nation, but the wider payment landscape does, and that affects how people use it.

Cash is still the second most popular payment method in the UK, accounting for 12% of all payments in 2023³¹. That share has fallen steadily: cash payments accounted for 15% of all payments by 2021, and 14% in 2022³². In the person-to-person front, cash payments are being replaced by Faster Payments person-to-person payments³⁴. PayPal sits inside that shift, as one of the ways people move money without cash.

On branch access, 4% of day-to-day account holders paid bills face to face in a branch in 2024, down 2 percentage points since 2022³⁵. That matters for anyone who relies on a branch rather than an app, and it is a reason some people end up using PayPal or a similar service instead.

The rules that differ between England, Scotland, Wales and Northern Ireland are mostly in benefits and public services rather than payments. Personal Independence Payment is only available in England, Wales and Northern Ireland, with Scotland running its own replacement³⁶. For money held in a PayPal account, the capital rules for means-tested benefits count money in a bank, building society or PayPal account²¹. In Northern Ireland, the banking landscape and the departments people deal with differ, though the payment rules PayPal applies do not³⁸.