![]() It spends some $300 million annually on anti-fraud measures. Last year, PayPal processed $235 billion in payments from four billion transactions. These approaches-leveraging data and technology to stamp out risks-have become the company’s signature. Today, 170 million people use PayPal, and the company’s fraud rate is only 0.32 percent of revenue, nearly 75 percent better than the 1.32 percent average among merchants, according to LexisNexis’s 2015 study “True Cost of Fraud.” The company didn’t stop there, though: It now also employs thousands of agents to manually sift through data and help refine models. Maybe more importantly for the long run, the shift helped PayPal win favor among consumers, businesses, and governments. Within a few months, PayPal’s fraud rates had dropped dramatically, taking the company from major loss to being one of the safest companies around. Levchin also built an algorithm called Igor (fondly nicknamed after a Russian fraudster who had taunted them in earlier days-and the type of actor the program was designed to help catch) to help identify abnormal patterns in one of the first major commercial applications of big data.īetween the CAPTCHA solution and Igor, PayPal’s innovative solutions turned out to make a huge impact. What they came up with was an early version of CAPTCHA technology, now used practically everywhere, to block spammers from creating fake accounts. To fight fraud, the company’s now-famous CTO, Max Levchin, and engineer David Gausebeck, worked to develop a mechanism that would complicate account creation for fraud rings without discouraging potential customers or reducing conversions. Today, however, PayPal’s innovative approaches to combating fraud have become as core to its business as the transfer of money in the first place. PayPal’s situation-then as now-illustrates the unique challenges fintech companies face in balancing ease-of-use with stiff security and compliance requirements. In an environment where consumers had come to rely on their credit cards to protect them against fraud with no questions asked, they expected the same of this new payment system provided by PayPal. “Unchecked fraud would have put all of our legitimate customers and the very existence of our payments network at risk.” ![]() “Had PayPal not found a way to get fraud under control, it would have destroyed the company,” Eric Jackson, the company’s former marketing director, wrote in his book The PayPal Wars. ![]() In fact, according to The PayPal Wars, the company was once incurring $2,300 in fraud losses every hour. By the early 2000s, the fraud rate had soared above 120 basis points-costing the company millions and threatening to break already brittle relationships with credit card associations. Credit card chargebacks were soaring, criminals were using the company to launder money, and phishing attacks led to outright account theft. In PayPal’s earliest days, fraud threatened to topple the peer-to-peer payment giant.
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