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PayPal Fights Back on Security Claims

Last week, I wrote about PayPal’s new mobile payment service.

Unlike other mobile payment options like Google (Nasdaq: GOOG) Wallet, PayPal doesn’t require Near-Field Communication (NFC) technology to operate. Instead, users simply enter a phone number and PIN code once they’re ready to make a purchase.

Now that the service has officially launched, however, some are beginning to question if this unique payment method provides enough security…

Visa’s (NYSE: V) Jim McCarthy, for instance, claims that there are “real issues” with PayPal’s payment system.

But PayPal fought back against these claims. Its Communications Director, Anuj Nayar, says:

“With PayPal, your financial information can’t be lost or stolen from your wallet, your card, or your phone… It’s safer in the PayPal digital cloud than in your pocket.”

The problem is, McCarthy points out, that with PayPal’s method, not requiring a physical payment device (like a card or smartphone), makes it even easier for a thief to access your funds.

Here’s how…

Cover That Keypad With Both Hands

The scenario McCarthy describes involves someone watching over your shoulder at a point-of-sale terminal as you enter your phone number and PIN code and memorizing that information to make purchases later on.

That’s a valid concern, for sure. And it’s something I think about each time I enter my debit card’s PIN code, considering those keypads aren’t exactly designed with confidentiality in mind. But I don’t normally worry about it too much because a thief would need to hijack my debit card to use the code to begin with.

Not the case with PayPal’s service.

The same goes for transactions using NFC. As a Wall Street Daily reader commented this week:

“With NFC, someone has to steal your phone. [With] the proposed PayPal solution, someone could key log your phone number and PIN. NFC appears to be more secure to me.”

I tend to agree. Which is why you won’t see me leaving Google Wallet any time soon.

But the convenience of PayPal’s service might have other consumers thinking differently. After all, what’s easier than punching in a few numbers without having to take out a wallet or smartphone?

That simplicity might be enough for many consumers to look past this glaring security problem.

Not to mention that it’s convenient for retailers, too…

Sweet Incentives Should Get Retailers on Board

A major bonus of PayPal’s system is that it doesn’t require new NFC payment terminals. As Naya told me this week:

“We’re addressing the friction points that exist in commerce today by ensuring that PayPal’s digital wallet works with retailers’ existing [point-of-sale] systems.”

And the company’s sweetening the deal even more…

By subsidizing its service, PayPal is giving businesses the chance to save money on transaction fees that are imposed by the credit card companies. As Nayar puts it:

“We intend to offer competitive pricing to merchants at greater value compared to the existing legacy providers and potential PayPal imitators.”

No wonder Visa has it out for PayPal! Merchants could end up using PayPal’s pricing structure as a bargaining chip to force credit card companies to lower their fees.

Like Rod Bourgeois, an analyst with Sanford C. Bernstein & Co., says:

“We see PayPal partly as a pawn that merchants can use to exert pressure on [credit card companies] and the interchange rates they control.”

We’ll see if PayPal’s plan attracts retail partners soon enough.

Its first official partner, Home Depot (NYSE: HD), is rolling out the service to 2,000 locations next month. And the goal is to get a total of 20 major retailers on board by the end of the year.

If that doesn’t work out, PayPal can always just turn to an NFC solution instead.

Good investing,

Justin Fritz

Justin Fritz

, Executive Editor

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