A new report from Duo Security revealed that PayPal's two-factor authentication technology can be bypassed, and the online-payment company—which does not disagree with the findings—is disabling two-factor authentication for its mobile users.

Two-factor authentication, a widely recommended approach, is intended to provide an additional layer of security for user account access. In addition to a static password, two-factor authentication requires the user to have a second password (or factor) that is randomly generated in order to gain access to a site or service. In PayPal's case, the mechanism was subverted.

Duo Security did not discover the two-factor authentication bypass of PayPal on its own. Researcher Dan Saltman discovered the bypass issue March 28 and reported it to PayPal's bug-bounty program. After not receiving a status update from PayPal, Saltman contacted Duo Security on April 22. Zach Lanier, senior security researcher at Duo Security, explained to eWEEK that Saltman is a friend of Dug Song, Duo Security CEO.

"Two-factor authentication was, and is, still enforced in full in PayPal's Web properties, for example, www.paypal.com," Lanier said. "This is a flaw in the authentication flow as it relates to api.paypal.com and, by extension, mobileclient.paypal.com."

PayPal issued a statement on the current status of two-factor authentication support across both its Web and mobile clients, in light of the Duo Security disclosure today.

"As a precaution, we have disabled the ability for customers who have selected two-factor authentication to log in to their PayPal account on the PayPal mobile app and on certain other mobile apps," Anuj Nayar, senior director of global initiatives at PayPal, stated. "These customers will still be able to log in to their PayPal accounts on a mobile device by visiting the PayPal mobile Website."

Though Saltman first reported the issue to PayPal on March 28, Lanier noted that may not necessarily be the first, or only, time the issue was reported to PayPal. There has never been any public discussion or disclosure about this issue, so it's possible that it had been previously reported, he said.

"In reflecting on some of the changes and overhauls PayPal seemed to have conducted to their APIs and mobile applications, with regard to the authentication processes in particular, this flaw may very well have been introduced in 2010 or 2012," Lanier said. It's also not known if the flaw was ever actually exploited in the wild by a malicious attacker, he added.

Disclosure Process

Lanier's timeline of correspondence with PayPal's bug-bounty program indicates that Duo Security informed PayPal on June 9 of its intent to publicly disclose the issue on June 25. On June 19, PayPal sent a request back to Duo Security asking for a delay in the public disclosure, noting that PayPal had a target fix date of July 28.

As to why Duo Security didn't comply with the PayPal request to delay disclosure, Lanier noted that 60 days is a fair amount of time for issues of this type to be addressed. For example, Google currently has a 60-day rule for responsible disclosure.

PayPal actually paid out an initial bug-bounty reward to Duo Security on June 16, as well.

"As we're not intimately acquainted with the decision processes behind setting bounty payouts for the eBay/PayPal bounty program, we're not entirely comfortable discussing the amount that has been paid out to this point," Lanier said.

Duo Security has only been issued an initial payment and, as far as Duo Security is aware, per the bug-bounty program terms, they do not need to repay the bounty, as a result of disclosing the vulnerability, Lanier said.

"For many vendors, product security response is not a truly perfect science; this is exacerbated by bug bounty/rewards programs," Lanier said. "Regardless, some of the policies that we encountered when initially working with PayPal, such as being unable to share case details, stifled the process."

PayPal's delay in responding to status inquiries didn't help the process either, he said.

Although two-factor authentication provides an additional layer of security, but it isn't the only way PayPal secures its users, Nayar said in a statement.

"We have extensive fraud- and risk-detection models and dedicated security teams that work to help keep our customers' accounts secure from fraudulent transactions every day," Nayar stated.

PayPal is owned by eBay, which uses a similar two-factor authentication system for its user accounts. eBay was recently the victim of an attack that compromised its user database, which led the company to advise users to change passwords. The PayPal two-factor authentication issue, however, does not seem to have an apparent impact on eBay.

"We briefly tested the two-factor authentication on eBay, at least in an attempt to replicate this technique, but it did not seem to be vulnerable," Lanier said.

Sean Michael Kerner is a senior editor at eWEEK and InternetNews.com. Follow him on Twitter @TechJournalist.