PayPal is not a bank, but is entitled to deposit insurance, the FDIC says

PayPal Inc., which facilitates online payments, especially at person-to-person auction sites, may look to some like a depository institution, but it’s not, the FDIC says.

Because PayPal accepts payments from buyers and holds them in a bank account for disbursement to sellers, some states questioned whether PayPal was itself an institution that accepted deposits and therefore subject to state banking regulation, the company says. So it turned to the Federal Deposit Insurance Corp., the federal agency that insures bank deposits against losses due to bank failure, for clarification. The FDIC said this week that PayPal is not a depository institution but in fact a depositor and so its funds held in banks are covered against losses by the FDIC. While the FDIC opinion is not binding on states, many state bank regulators will take it into account in determining the status of PayPal, the company believes.

Customers who do not request immediate payment from PayPal can either instruct PayPal to deposit the money into a bank account on their behalf or invest their funds in a PayPal money market fund, which is not covered by the FDIC.

"We are delighted to be able to enhance the safety of customer funds as they move through our payment service," said PayPal CEO Peter Thiel. "While customers will continue to be able to request a withdrawal by check or electronic funds transfer at any time, those who do not immediately request a withdrawal have two attractive options: a nightly sweep into a money market fund where their funds earn a rate of return, or a deposit on their behalf at a financial institution where it is eligible for FDIC insurance."

PayPal says it will continue its applications for state money services licenses where appropriate.

PayPal has more than 14 million member accounts, including more than 3 million business accounts. In 2001, PayPal processed over $3.5 billion in payments.