Should you replace your bank account with PayPal?

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When you pay for a product online, chances are you’ve noticed an option to checkout with PayPal. If you’ve used it, you’ve probably also noticed how easy it is to pay for your purchase without entering any extra information. Maybe you’ve also used PayPal to send money to friends instantly. And if you’re a really frequent PayPal user, you might have received an email offer to apply for a PayPal credit card or a PayPal line of credit that can help you rack up rewards points or cash back. All this might make you wonder if PayPal might be a better option than a traditional checking account.

How does PayPal work?

PayPal is available nearly everywhere – 202 countries to be exact. That massive network also offers the ability to transact in 25 different currencies.

When you have an account, you’ll need to have a funding source – another account that lets you load money into your PayPal account. You can link a credit card or an outside bank account, or you can also skip any outside sources and use one of PayPal’s own products. PayPal offers two credit cards, a debit card and a prepaid card that is managed by Netspend.

No matter how you put money in a PayPal account, the basics of using your account are rooted in three functions:

  1. Shop online. Loads of merchants like Target, Adidas, Walgreens and other retailers let you pay with PayPal when checking out online.
  2. Send money. Sending money via PayPal to another PayPal user is simple. If you’re paying for a product or service, the seller will pay a small fee for the transaction. If you’re paying a friend – for example, reimbursing someone for splitting a check at a restaurant – there is no fee.
  3. Request money. You can also have the platform send other users a request to pay you. For example, if you are a freelance worker who needs a client to pay for your services, you can request that he sends your funds via PayPal.

It’s important to note that PayPal has expanded to do much more than streamline digital payments, including making big waves with the ability to buy and sell cryptocurrency. PayPal’s debit and prepaid cards give customers the ability to withdraw cash at ATMs and make in-person purchases, and the prepaid card even lets customers open a savings account. The funds in the prepaid account are not held by PayPal; the company is not a bank. Instead, they are held at The Bancorp Bank, which is a bank that offers traditional FDIC insurance up to $250,000.

More information about PayPal accounts for bank customers

If there’s a savings account option, you might ask, isn’t the PayPal Prepaid Mastercard® just like a regular bank? Not so fast. While that savings account does allow customers to earn an impressive APY on balances under $1,000, any money over that $1,000 threshold earns interest more in line with some of the best money market accounts and savings rates available.

That earning potential can be a strong selling point for keeping money with PayPal Prepaid card, and PayPal’s sales message promotes that its direct deposit service gives you access to funds “two days faster than what traditional banks offer.” However, the company’s approach comes with a downside: no physical place to turn for help.

“One of the largest drawbacks for a consumer looking to make their primary financial relationship is the lack of personal connection via branches,” says Rachel Huber, senior analyst at Javelin Strategy & Research. “It’s been popular for years to say that ‘the branch is dead,’ but that is simply not true. Nearly 9 in 10 (87 percent) of consumers conducted an activity at a bank branch in the past year, even amid pandemic restrictions.”

Additionally, Huber points out that even as PayPal has beefed up its portfolio of payment options – in addition to credit, debit and prepaid cards, PayPal offers an installment plan – the company lags behind big banks in terms of choice.

“Chase has 29 credit cards available and Bank of America lists 23 available for consumers to apply for [versus PayPal’s four cards],” Huber says. “They are highly segmented toward different customers, aspirations and backgrounds.”

PayPal doesn’t offer any of the bigger services you may need one day. For example, while you might just need a place to deposit paychecks now, what if you need a bank to help you finance an auto loan or a home down the road? Those services will likely require a traditional financial institution, not PayPal.

Better banking alternatives?

Should you use PayPal as your bank account? If you cannot open a bank account due to a bad ChexSystems report, PayPal can be helpful. The company’s prepaid card has a $4.95 monthly fee, which can be a better alternative to paying loads of extra fees for check-cashing services.

However, if you can access a traditional checking and savings account, a PayPal account may be best used in tandem with an account at a federally insured institution with other attractive features like low fees and high CD and savings account rates. Sometimes, using your PayPal account can wind up boosting your rewards, too. For example, one of Chase’s bonus categories for certain credit card holders included a 5 percent cash-back incentive for using PayPal at checkout while linking it to your Chase card.

Still, rewards and other additional features should not be the determining factors in where to keep your money.

“So long as all consumer protections are in place and all funds are fully insured, the question about whether a consumer uses a bank, a fintech or a prepaid card as their primary everyday financial account is ultimately a personal choice about convenience, price and features,” says Rob Levy, vice president of research and measurement for Financial Health Network. “The question we should be focused on is not bank versus non-bank, but rather what company is going to address a consumer’s financial health needs best — across spending, saving, borrowing, and planning. Who can do it most reliably, most affordably and with an eye towards helping that consumer improve their financial well-being over time.”

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Written by
David McMillin
Contributing writer
David McMillin writes about credit cards, mortgages, banking, taxes and travel. David's goal is to help readers figure out how to save more and stress less.