PayPal Woos Sellers with System to Vet Buyers

[Archive]

Posted By: bruce Dorskind

PayPal Woos Sellers with System to Vet Buyers

American Banker Monday, June 18, 2007
By Daniel Wolfe

PayPal Inc., which has long viewed small business as a prime area of opportunity, is now looking to its data on customer transactions as a way to give it a leg up on other financial services providers.

The core of the latest offering: a risk-assessment service that warns merchants when the company is giving extra scrutiny to specific transactions. The move takes advantage of PayPal's direct involvement in the payments process, and analysts said it could be a more effective way to filter potential online fraud risk than using standard credit bureau data.

Jeff Clementz, the director of merchant risk at PayPal, said in an interview Friday that it wants "to provide more risk information to sellers so that sellers can make better decisions. ... This is one step along that vision."

PayPal, a subsidiary of eBay Inc. of San Jose, already evaluates every transaction that moves through its system but does not share much from its findings.

But its Payments Review service will notify sellers when a transaction requires additional scrutiny. The merchants will be advised to delay shipping products until PayPal has completed that assessment. It can be used by merchants of any size, whether they sell through eBay or not.

Under the current arrangement, PayPal tells merchants only whether it has confirmed that the buyer's shipping address matches that of a bank account used with a PayPal account.

Mr. Clementz said that PayPal has touted its "very sophisticated fraud screen." Its users are well aware that the company is doing much more behind the scenes than just verifying buyers' addresses, he noted.

Though PayPal users know that its systems are performing a risk assessment on their behalf, they do not currently know when a particular transaction is getting extra scrutiny. "Our users have long asked us to provide notification when we're reviewing a payment," he said.

Avivah Litan, a vice president and research director at the Stamford, Conn., market research company Gartner Inc., said that PayPal has "great account monitoring systems."

"They monitor activity in every account on a daily basis so they can see unusual activity" that individual merchants might not normally see or notice, she said. "They've obviously figured out how to leverage that" information, she said.

The tools commonly used to evaluate customers at traditional walk-in stores, such as credit reports, are not always a good fit for e-commerce, she said. "You should not use credit scores for fraud detection," she said. Such scores are "really measuring creditworthiness, not the likelihood of fraud."

Payments Review was announced at the eBay users' conference, eBay Live, in Boston last week. It will be tested this summer and will be free to merchants. PayPal plans to offer additional risk assessment tools in the fall, though Mr. Clementz declined to describe them.

PayPal's anti-fraud system evaluates an array of information in deciding whether to allow a transaction to go through, including such minutiae as capitalization habits.

When Payments Review goes live, PayPal will tell merchants when it is giving buyers' accounts extra scrutiny, Mr. Clementz said. Though accounts with confirmed addresses are generally safer, even these may require extra review, he noted.

When that happens, the merchant is advised to delay shipment to the buyer until PayPal has approved the transaction, he said, though the seller is free to ignore that advice.

"If they want to ship the goods before we've completed our review, then they would just be taking the risk that we would be denying that payment," Mr. Clementz said.

If PayPal does not approve the transaction, the merchant is free to complete the sale with another form of payment, such as a credit card, he said.

PayPal will not tell merchants why a particular buyer required extra scrutiny, but if it approves the sale, PayPal will stand by its decision by also assuming the risk for that sale, he said.

PayPal also announced that all its users can buy one-time password tokens to gain stronger authentication on their accounts. The tokens, from VeriSign Inc., have been available to test users since December. http://www.americanbanker.com/ http://www.sourcemedia.com/