Just like a bank, PayPal makes money off the "float" of the funds they manage. In other words, PayPal is earning interest against the money that you (and millions of others) have placed into their accounts, but not spent yet.

Think of it this way: PayPal has roughly 50 million members. If each member left $10 in their account for a year, the accrued interest would total around $500 million dollars. Even at an interest rate as low as 1.75 percent, PayPal would be earning $8,750,000 every year, just for letting the money sit there!

Additionally, PayPal makes money by charging transaction fees for Premier and Business accounts: There's no charge to send money, but when you receive money, PayPal takes a percentage of the amount (between 1.9 percent and 2.9 percent) plus a 30-cent USD transaction fee.