PayPal’s history of fighting fraud

In PayPal’s earliest days, fraud threatened to topple the peer-to-peer payment giant. Credit card chargebacks were soaring, criminals were using the company to launder money, and phishing attacks led to outright account theft. 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. In fact, according to The PayPal Wars, the company was once incurring $2,300 in fraud losses every hour.

“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 the book. “Unchecked fraud would have put all of our legitimate customers and the very existence of our payments network at risk.”

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.

PayPal’s situation — then as now — illustrates the unique challenges fintech companies face in balancing ease-of-use with stiff security and compliance requirements. 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.

Max Levchin and David Gausebeck were primarily responsible for coming up with PayPal’s solution to fraud, and the techniques they developed are still in use today (though continuous refinement helps PayPal stay one step ahead of fraudsters). Read about the specifics of their solutions in the full version of this article on Fin.

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