If you regularly find yourself with a PayPal balance or you use PayPal often, then you may have considered using it as a savings account.
And it’s a reasonable consideration. While PayPal is not a bank, it deals with immense amounts of money on daily basis and has over 280 million users under its belt transferring funds electronically. But can this online payment system double as an effective savings account? [Short answer: No.]
While this may be tempting, you’ll want to know the potential drawbacks in doing so and the banking features that you may be missing out on.
What Does PayPal Do?
Since 1998 PayPal has been facilitating online transfers of money. They built a loyal following in E-Bay shoppers and sellers early on as they proved themselves to be an effective means to buy and sell goods.
From 1998 – 2000, their business model was actually to earn interest on balances idling in user accounts. At the time, it seemed promising. Interest rates were in a much different place than they are now. 6 month CDs, for example, were paying out just over 4.5% APY. The problem, PayPal found, was that users withdrew credits immediately, rarely leaving cash behind for PayPal to accrue interest on.
After this realization PayPal focused on the merchant side, charging small service fees per transaction.
Today, this service charge on online money transfers is still the primary revenue driver for PayPal. PayPal has 286 million active users with the average user conducting ~37 transactions per year.
Is PayPal a Bank
Peter Thiel, the founder of PayPal, has stated that PayPal is not a bank because it does not engage in fractional reserve banking. Essentially meaning the company does not engage in the act of borrowing and lending their customers’ funds.
Federal Regulators also reiterated this notion back in 2002, stating that PayPal is not a bank and shouldn’t be regulated as such.
That being said, PayPal has dipped their toe into banking products. They’ve tested out money market accounts, lines of credit and even a debit card, which is still offered as the PayPal cash card.
Are PayPal Accounts Insured by the FDIC?
Yes, by proxy.
While PayPal itself is not a bank and is not FDIC-insured against insolvency, they will deposit your funds into one or more custodial account(s) that they maintain at one or more FDIC-insured bank (currently Wells Fargo Bank, N.A.).
Drawbacks To Using PayPal as a Savings Account
One of the main benefits of an online savings account (or any demand deposit for that matter) is access to your cash. It’s your hard-earned money and you should have access to it whenever you need it.
If you’re using your PayPal account as a savings account, however, you’ll need to open the PayPal cash card to gain immediate access to your cash balance. Otherwise transferring funds from your PayPal account to your bank account can take between 3 and 5 business days.
The other primary benefit of an online savings account is the high interest rate. Generally speaking, online banks can provide higher than average rates to savers given their low overhead costs (no brick and mortar locations and staffing).
That said, this benefit is less pronounced these days as we’re in a very low interest rate environment. Top rates on online savings accounts are barely touching 1.00% APY today.
PayPal also takes security, fraud, scams and overall policy violations extremely serious. They are notorious for shutting down accounts and asking questions later. This should also weigh into your decision on whether or not to treat your PayPal account as a savings account, as you could see your funds frozen if you inadvertently send PayPal red flags.
Usually if you get your account frozen, PayPal will ask you to provide more information or they will simply tell you to wait 180 days to get your money back.
While we certainly wouldn’t recommend anyone use their PayPal account as a savings account, we understand the temptation especially for frequent PayPal users.
We do think PayPal has a decent debit card option in their PayPal cash card. And we’re happy to see PayPal leveraging the FDIC insurance of actual banks.
But all that to be said, it deserves repeating the simple fact that: PayPal is not a bank.