If you use eBay or have paid someone over the Internet, you’re probably familiar with PayPal. The basic PayPal service lets people pay another PayPal account holder almost instantly. It’s an alternative to paying someone by check, or via cash.
The setup for PayPal and alternative services such as Dwolla is straightforward:
- Enter your bank account information
- Wait a few days for the accounts to be connected
- Confirm that several small electronic funds transfers have taken place — typically a few pennies are deposited into your bank account, which verifies to PayPal, Dwolla, or competing services that the account is yours.
- Transfer some of your bank funds to the PayPal or Dwolla account. You will be able to use these funds to pay other people who have an account with the same service.
The services have different fee structures:
- PayPal transfers between private parties are supposed to be free, but business-related transactions are charged a fee that totals about 3% of the transaction.
- Dwolla doesn’t charge anything for basic transfers, but has fee-based services for priority support and other features.
The services are convenient, and I have used both PayPal and Dwolla for my business. However, there are definite drawbacks:
- Each service requires both the sending and receiving parties to have active accounts with the same service, and connected bank accounts. This means if you want to pay someone right away, and they don’t have an account, it will take that person at least three or four days to get the account set up and connected with his or her bank. In that time, you could easily write and send a check.
- Although the services are supposed to be easy to set up, many people have trouble getting their bank accounts connected or performing other basic functions.
- Because online payment systems have been abused by fraudsters and organized crime, these companies are often overzealous about sudden, unexplained flows of money. PayPal is notorious for freezing legitimate accounts and making it nearly impossible to quickly access frozen funds.
Many people have understandable qualms about trusting their bank information to a Web-based service that will store the data remotely. Conceivably, a lot of money can be instantly lost if passwords and other credentials are stolen.
There are other alternative payment systems (including new virtual currencies like Bitcoin) as well as traditional money transmission services such as Western Union. While these services have features that some people may find useful, they also come with risk and other drawbacks.
This post was excerpted from Personal Finance For Beginners In 30 Minutes, Vol. 1, by Ian Lamont. All rights reserved.