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PayPal, which is now owned by eBay has always been used as a payment method for person-to-person transactions, especially for auctions payments. Recently PayPal has become an attractive option for web-based credit card payments as well.

The process works roughly as follows: when a customer decides to make a purchase, he or she is redirected to a page on the PayPal's site (possibly, co-branded with the merchant's logo, etc) where the customer enters his/her credit card information. During the redirect, the store "passes" certain parameters (like the item being bought, price, etc) while certain other parameters are pre-configured by the merchant in their PayPal configuration. The credit card information entered by the customer is used to open a new "payer" account with PayPal, which is immediately used for payment. The merchant also effectively gets money in their PayPayl account.

Paypal's PayPal Credit Card Payments service charges merchants $0.30 per transaction plus 2.9% of the total amount, without a monthly fee (NOTE: terms subject to change).

The main drawback of using PayPal (except limited service options compared to the actual merchant account) - some people experience significant delays in getting their money because PayPal's "security checks" may take a while.

PayPal is a reasonable choice for low-volume e-commerce sites, but for a strong business you'll probably need to open a real Merchant Account.

P.S. Slightly off-topic, but not really: for more information on different types of credit cards, check out our flagship site, Credit Card Menu.