January 23, 2009, 9:16 am

A few days ago I posted on the security hole I discovered in Paypal where payments to my email were flowing to someone else's account. After denying the problem for quite a while, Paypal finally admitted it.

In the last two days, I have had two other problems with Paypal. The first was that an account hold was slapped by Paypal on my account. Apparently I accessed the account from an IP address (maybe a hotel on the road?) they had never seen me at before and so they froze my account until this morning when I had to spend an hour convincing them in various ways I really did control the account.

The second issue was when Paypal put a hold on a payment I received. At first, I was ticked off at the buyer, thinking that person had received the item and then was trying to keep his money. But it turned out the buyer had nothing to do with it. Again, the Paypal computers saw the buyer account had been relatively inactive and held the payment until the buyer called in and convinced them the payment was legitimate.

Now, at some level, one can say that Paypal is trying to protect my money. But if fraud is so prevelent in Paypal that these kind of onerous fraud checks and constant account and payment freezes are becoming the norm, then it may well be that their business model is in trouble. Like strip searches at the airport, it may increase security but it may also kill the business.

If you had asked me five years ago, I would have said it likely that by 2009, we would have an online payments system that involved some type of digital certificates on individual computers tied to either a payment system or one's credit card number. My corporate cash management account works this way, but the retail world does not. Part of the problem is that there is only limited consumer incentive to demand such a system. Currently, most fraud costs are pushed by card companies unto retailers rather than consumers (who can fairly easily void a fraudulent payment) reducing the percieved cost of low security.

Postscript: It is always interesting to listen to the tone of customer service agents. I talked to four different Paypal agents this morning, and the fairly clear undertone of their responses to my rants about these problems was "it's as bad around here as you think it is."