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Identity Theft: Paypal vs. Credit Cards, Phishing vs. Credit Card Fraud
May 3, 2007
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In its own way, Identity Theft, with tens of Millions of victims this decade, is a phenomenon. It has revolutionized the way criminals steal and the way law enforcement must deal with such problem. Paypal, with over 133 Million accounts worldwide, is also a phenomenon, having revolutionized payment processing, and the way consumers and vendors pay and receive money. Paypal, and other similar payment processors, are primarily threatened by Phishing. On the other hand, traditional Credit Cards are primarily threatened by various Credit Card Fraud schemes, including Phishing. Does Paypal have an advantage over traditional Credit Cards when it comes to Identity Theft concerns?
When consumers use Paypal for online payment processing, the vendor typically does not receive, nor retain payment information. In such a transaction, a consumer is momentarily forwarded to Paypal to complete payment, and then is returned to the vendor's website. On the other hand, when a Credit Card is used, payment information is disclosed to vendor, and is usually retained, including sensitive Credit Card information. If such information is mishandled, or is the subject of a security breach, then a consumer is at risk of Identity Theft. There have been several cases lately, with reputable firms, where consumers' sensitive information was mishandled, such as with TJ Max, CVS, etc... In essence, using Paypal reduces the risk associated with the possibility of mishandling sensitive information by vendors.
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 | Meanwhile, consumers are still at risk of Phishing scams. In such a scam, a consumer may be fooled by an entity pretending to be Paypal or another financial institution, into giving away sensitive information about his own account. Due to the widespread use of Paypal, Phishers like to target Paypal account holders. However, Phishers also target other financial institutions, including Credit Card issuers and banks. If a consumer falls victim to a Phishing scam, it is typically due to the consumer's own action of inadvertently giving away his sensitive information. On the other hand, when a consumer is exposed to Credit Card Fraud, whereby information is retrieved from the vendor, the consumer is powerless to have avoided such incidence (unless such purchasing method was not used to start with).
The convenience associated with Paypal explains its rapid growth and acceptance. Paypal was launched in November 1999 and soon secured no less than 1.5 Million accounts worldwide. Such number grew to 16 MM by July 2002, 50 Million by 2004, and 133 Million by December 2006. In essence, Paypal grew to 133 Million users in only 7 years. Paypal also received no less than 20 awards for technical excellence, including "Best Finance Services Site" and "People's Voice Award" in 2006 Webby Awards.
Such rapid growth inevitably was accompanied by some problems. In 2002, there were complaints of unexplained account freezes, and dispute resolution procedures. Like all successful products, Paypal has its critics. From a statistical perspective, it is virtually impossible for any product adopted by Millions not to have critics: Starbucks, McDonald's, Wal Mart, to name a few, all are large scale products or services with critics....
Credit Cards adoption was also fast, although not as fast as for Paypal. The credit Card was first introduced in 1950, through Diners Club. By 1970, it is estimated by the Federal Reserve that as many as 16% of U.S. families possessed a bank type Credit Card. Today it is estimated that there are no less than 1 Billion credit cards in the U.S. |
The Credit Card also faced serious challenges through its fast adoption. According to an article by Robert Stein, published on PBS Frontline, "The Ascendancy of the credit Card Industry," there was a call for outlawing Credit Cards, following the Chicago Debacle of 1966. Such debacle resulted from Credit Card fraud associated with the mailing of 5 Million credit cards in the Chicago area, which ended up in the wrong hands, causing innocent consumers to receive bills for thousands of dollars of unauthorized charges. This event was so important, it ultimately resulted in Congressional Hearings. Yet, such event ultimately passed, and by the 1970's there were as many as 100 Million Credit Cards in consumers' hands.
According to an article by Reuters (3/21/2007), "Paypal Customers in Europe Number near 35 Million" Paypal's worldwide client base of 133 Million is divided into 86 Million U.S. users, and 47 Million international users. Considering that the average household size today is about 2.57 vs. 3.14 in 1970, with approximately 113 Million households as of 2004, it seems that Paypal has been adopted about 4 times faster than the Credit Card. Yet, it seems any previous issues associated with Paypal are not as severe as those that have been associated with the Credit Card (such as the events of 1966).
Given such facts, it seems Paypal has advantages over the traditional Credit Card from an Identity Theft protection perspective. Most importantly, consumers need to be vigilant about Phishing schemes. Consumers should verify any correspondence received from an entity claiming to be Paypal. Paypal does not send emails requesting personal information. Consumers who receive such emails can forward them to spoof@paypal.com . Paypal will typically reply almost immediately, alerting the consumer as to whether such email is fraudulent or authentic. Consumers should know that such schemes are not limited to Paypal, but to most large financial institutions.
It may also make sense for Paypal to expand into the "offline" business. When shopping at a department store, if somehow a consumer is able to use Paypal to pay for a purchase, there is a reduced risk of mishandling payment information. For example, instead of presenting a Credit Card to be swiped, a consumer would present a Paypal Card, which would also be swiped. Consumer would be connected directly to Paypal. The user is directed to an entry system to input account name and password. All such steps would be conducted "outside" the vendor's data retention systems. Once payment is complete, vendor's system would receive authorization, and consumer would also receive an alert of the transaction. That alert would be transmitted via email, sms, and/or wireless phone message (for security reasons). This is in contrast to Credit Card payment processing, which typically discloses the consumer's sensitive information to the vendor (credit card number, name, expiration, etc...). |
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