how does paypal work

I've been using it for a few years now and love it. The method I use is the bank-to-bank funds transfer, it's immediate and most sellers will start the shipping process once they get e-mail noification from PayPal that funds have been transferred to them, which is immediate.

Most internet merchants absorb the PayPal fee, but in transactions between single parties, that's negotiable.

Beware. IT's fine until you have problems. Then, there is no serivce or support and nearly no way to get a real person on the phone who can do anything for you. I happily used them for a while until they shafted me out of $500 a year ago and never resolved it. I complied with their so-called 'seller protection policy' to the letter, which apparently mattered for naught. They have no regulation yet operate like a bank. I will never use them again and to date they have still never resolved my issue above. This is but one of hundreds of stories, many far worse than mine.

-Ed Sawyer

I have never had a problem and love it's ease of use BUT Ed sawyer is right. I've personally heard horror stories. Probably one in a few thousand go wrong BUT I'd hate to be that person. I still use it; with trepidation.

A family member sold an item with payment received through Paypal. The buyer some weeks later made a bogus complaint about the item to Penpal. Before Paypal even contacted seller, Paypal refunded the previously received payment from seller's Paypal account. The seller was without his payment or his merchandise! This was an exploitable flaw in the Paypal business model which victimized a significant number of sellers on Ebay. Free merchandise was the best Ebay bargain, as discovered by some clever Ebay Paypal purchasers.
Paypal then tries to collect the refunded amount from the seller with the threat of impairing seller's credit rating. The seller has to close his linked bank account so that funds not drainable by Paypal.
The buyer is left with both his refunded money, and the seller's merchandise, and the seller is supposed to reimburse Paypal for their unjustified, unilateral, undiscussed gift to the buyer. As mentioned by writer above, there is no way to "resolve" any poor business practice by Paypal. Unless it happens to a seller it would never even be considered a potential problem before using Paypal. Unless one is a Ralph Nader type of crusader there is no response from a virtual monopoly like Paypal.

Ed, you bring up an interesting point regarding PayPal operating like a bank. It seems that many states feel PayPal should fall under the jurisdiction of a banking commission and subject to their laws and regulations.