PayPal is not a bank.

In case you thought PayPal is a bank, they are not. Let’s examine their terms for direct depositing and holding funds.

Note: PayPay often changes the wording and organization of their terms. Here is the archive of the page from the original time of writing.

Agent and custodian.

One way PayPal acts like a bank is that they accept your direct deposits directly. A bank has FDIC insurance. PayPal uses banks to hold your funds, and those banks are eligible for the insurance.

When you add money to your PayPal balance using Direct Deposit … the funds in your balance … will be eligible for FDIC pass- through insurance. PayPal will hold these funds as your agent and custodian and you will be the ultimate beneficial owner of the funds.

To be more accurate, these accounts belong to PayPal, not you. You are merely the beneficial owner of your funds.

So far so good. At least you can direct deposit into PayPal. This use is helpful for those who cannot use bank accounts and have some other way to spend their PayPal dollars.

Let’s move on to another common use: everything else. Buying things using credit cards and ACH through PayPal, receiving payment via PayPal are common ways of transferring value into PayPal dollars.

If funds are received in your account other than through Direct Deposit, there might be a delay between the time that funds are credited to your PayPal account and when we actually transfer those funds to one of the custodial accounts.

Your PayPal balance funds might not be insured by the FDIC during this period, although we will still be holding the funds as your agent and custodian.

There might be a delay. No explanation as to why there is a delay, nor where the money exists during this delay. We can only assume PayPal holds it in a non-custodial account or in their own rolling reserve.

Remember PayPal is not a bank. A bank often has more obligations to you, such as paying interest or making money in any way other than floating yours.

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