One thing banks are
concerned about with PayPal is if users place more funds on account, as
this means you could operate a revolving debit account within PayPal
with no funds ever flowing through the banking system. For example, I
could place £1,000 on debit with PayPal and then use that to buy and
sell goods, continually topping up, and never use my bank's credit or
Some $2 billion sits on the network this way at
any one time, as in users who keep debit balances within PayPal, and
obviously the more that increases the more powerful PayPal becomes. So
you would think it would be in the banks' interests to ensure that
people don't put funds into PayPal on revolving debit, but use the
banking system to pay for goods online via their credit or debit card,
So far, so good.
But then a little thing called 'fraudulent transaction' rears its ugly head.
encountered a suspected such transaction the other day, when I
purchased goods on eBay for £800 and the seller only accepted PayPal
payments. This should have been no problem as I've had a PayPal
account for years but, as I authorised payment, the message came back: "PayPal is unable to authorise this transaction, try another credit card".
I go to PayPal and add my AMEX card and try again. "PayPal is unable to authorise this transaction, try another credit card".
then spot that I can send the seller an e-cheque, which means funds
from my bank account are transferred to PayPal and, when cleared, those
funds are then wired to the vendor. So I go for that option but that
is going to take 10 days to clear and, in these days of instant
gratification, that's a real bummer.
What's the problem here?
the first payment was rejected by my bank as it looked like a
fraudulent transaction. I use PayPal irregularly and rarely for
transactions of more than £100, so an £800 payment appearing late on a
Saturday night looked fraudulent. I knew this when they rang me on
Sunday morning, 12 hours later, and asked me to clarify and prove it
was me trying to make the payment.
The same with the second transaction with AMEX, who rang me 36 hours later on Monday with the same request.
the third transaction just falls foul of the lengthy period of time it
takes the banking network to move funds across borders (something
that's been a SIBOS theme for the last three years).
really goes to prove is how inadequate the existing methods of managing
digital identities is right now. I mean, why call me 12 to 36 hours
after the event ... why not call me or text message me or email me or
use MasterCard SecureCode or whatever to enable the payment to go
through there and then?
What this also goes to prove is how
the inconvenience of the banking system will force users to find
alternative methods of making payments that are more convenient. For
example, the lack of ease of payment in this process forced me to take
a reasonable amount of balance (£1,000) out of the banking system and
put it into PayPal to ensure this never happens again. In so doing, I
now find I'm operating a closed-loop, off the bank network, transaction
service for higher volumes of low to high value retail payments. It's
In other words, the
banking system forced me to do exactly the opposite of what they wanted
me to do, and to place funds into PayPal's off-bank network.
In these days of cut-throat competition, if banks
are unable to find remedies for tracking fraudulent transactions and
then an effective, and immediate, method of gaining
proof of identity to either accept or reject the transaction, others
will. And those others may well just be the same organisations who
spotted the opportunity to manage digital payments in the first place.
I wonder who they might be?
Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal's Financial News. To learn more click here...