Is PayPal a Legitimate Bank?

A peek inside the Internet's most popular financial instutition.

Millions of people send and receive money over the Internet using PayPal. Users can manage their personal and business finances online or via an issued debit card. PayPal might behave much like a bank, but under U.S. law, it's technically something else.

The Facts

In the United States, a bank is a financial institution, licensed by the government and providing specialized financial services to its customers.

Bank Regulation

A bank agrees to regulation by an industry-specific body of U.S. law, covering fraud, credit, liens, contracts, banknote issuance, privacy and other issues.

PayPal

In a June 2007 BusinessWeek article, Catherine Holahan explained that PayPal isn't a bank because it depends on other financial institutions such as GE Consumer Finance to provide many of its services. In a 2002 advisory letter, the FDIC said that as long as PayPal doesn't accept direct deposits, it won't be regulated as a U.S. bank. In Europe, however, PayPal does have a banking license.

Other Differences

Per its User Agreement, PayPal doesn't run credit checks for new accounts unless the user registers for a business merchant account.

Considerations

Though it's not a bank, PayPal's flexibility and lack of regulation may be a boon for consumers looking for a financial services provider that's less regulated, and has greater Internet purchasing access.

References

• PayPal.com: User Agreement
• BusinessWeek: The Bank of PayPal
• ZDNet: FDIC Decides PayPal's No Bank

Resources

• PayPal.com: Fraud Protection and Online Security Center