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Can PayPal work as a savings account?

By Justin Boyle

PayPal handles a lot of money. The company is so well known that some online users might be enticed into using their PayPal balance as a de facto online savings account. But is this a sensible choice? Here’s a quick look at some of PayPal’s financial features and how they compare to those of a true savings account.

PayPal basics

When starting with PayPal, you set up a free account associated with your email address. Businesses can choose to pay a monthly fee for access to some upgraded features, but the free account may work just fine for individual savers and spenders.

Once you’re set up, you link your PayPal address with a checking account, savings account, credit card, debit card or prepaid cash card and you’re ready to go. Transferring money into and out of your PayPal balance takes just a few clicks, and keeping tabs on it is as easy as logging in from any available Internet connection.

But can you bank there?

PayPal already offers banking-style services to its users, such as lines of credit and a reloadable debit card, and the company has dabbled in money market accounts. Despite an FDIC ruling that PayPal is not an official bank, the tech giant does seem to leave the door open for comparison.

What’s more, PayPal deposits any funds held in user accounts with FDIC-insured banks, which grants its users “pass-through protection” from the FDIC. PayPal user accounts up to $250,000 are effectively insured against the company’s potential insolvency, just like they would be at an official bank.

Now the bad news

Of course, if you’ve socked away cash for an emergency, you may need it on hand right away. Transferring money from a PayPal account into a more universally liquid instrument can take as many as five days, which stands as a mark against it as a place to park emergency savings.

It’s also important to note that PayPal takes a very serious approach to security, and site administrators have been known to freeze funds in user accounts at the first sign of irregularity. The typical freeze lasts about three weeks, but accounts have been frozen for up to 180 days in some cases, with little short-term recourse on the part of the user.

All this plus the zero percent interest rate earned on a PayPal balance may make it seem as though PayPal has no place at all in your savings life. But while it’s probably best to think twice about storing long-term or emergency savings with PayPal, there are situations where it can make sense to keep some cash in your account balance.

If you’re saving up for a big-ticket online purchase, for example, keeping that money in your PayPal account can ensure that it’s ready right when you reach your goal. It can also help when you’re saving to afford a surprise gift for your spouse or domestic partner, since there’s no risk of a PayPal statement showing up in your shared mailbox and dropping inopportune hints.

So as long as the three- to five-day transfer period isn’t a problem for you, your PayPal account may add some flexibility to your savings strategy. While PayPal may not replace your general-purpose savings account, creative savers may still appreciate its benefits.

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