This excerpt taken from the EBAY 10-K filed Feb 17, 2010.
PayPal Transaction Overview
Buyers make payments at the PayPal website, at the eBay.com website, or at the websites of merchants that have integrated PayPals Website Payments or Express Checkout features. To make a payment at PayPals website, a buyer logs in to his or her account and enters the recipients email address and the amount of the payment. To make a payment through eBay.com or merchant websites, a buyer selects an item for purchase, chooses PayPal for payment and enters his or her email address and password to authorize the payment. The buyer chooses whether PayPal debits the money from the buyers PayPal balance, credit card, Bill Me Later account (in the U.S.), or bank account and the payment is then credited to the recipients PayPal balance. For some bank account payments (which we call eCheck payments), the transaction is held until the funds have cleared the senders bank, which typically takes three to five business days. Once the payment is completed, the recipient can make payments to others or withdraw his or her funds at any time via check (in the U.S. and five
other countries), electronic funds transfer, a PayPal-branded debit card (available only to U.S. users), a prepaid card (in the U.K. and Italy), or through a credit to a recipients credit card account (in limited markets).
PayPal earns revenues in several ways:
PayPal incurs funding costs on payments at varying levels depending on the source of the payment. Funding costs associated with credit card and debit card funded payments are significantly higher than bank account, Bill Me Later, or balance-funded payments. U.S. account holders who choose to maintain PayPal balances in U.S. dollars have the ability to sweep balances into the PayPal Money Market Fund. The PayPal Money Market Fund, which is invested in a portfolio managed by BlackRock Fund Advisors, bore a current compound annual yield of 0.08% as of December 30, 2009.