Originally Posted by Bill Fitzmaurice
PayPal can work just like a credit card, where the seller is assigned an authorization for the amount of the sale and that amount is put on hold in the buyer's PayPal account until the seller ships, at which point the seller actually receives the funds. This option is seller based and it's how most legitimate enterprises selling high ticket items do it.
The problem with this is that it doesn't prevent fraud any more than the "take the cash right away" method. Same with credit cards. The authorization is simply a tool to protect the seller from fraud by the buyer as it allows them to secure funds even though, by policy, they don't charge the customer until they ship.
If a seller wants to they can simply mark the transaction in PayPal as shipped and take the money. Paypal has no way of knowing it actually shipped.
Paypal is always a bad choice if you can use a credit card instead. There are many more protections for both the buyer and seller when using credit cards because of the amount of rules and regulations that must be followed.
As a seller I'd only use Paypal or something similar ONLY if I had no choice (ie I was running a shady business and had problems with credit card processing or excessively high fees due to being a "high risk" merchant.
As a buyer it's not overly difficult to claim fraud with PayPal and get your money back. Happens all the time to merchants where buyers buy something then state they never ordered the item.
In any case PayPal is mainly a solution for those who don't want to use credit cards and can't do a cash transaction easily due to distance or want "some" level of protection.