As PayPal's Home Depot In-Store Trial Expands, Can Users' Sloppy Security Habits Change?

PayPal's expansion of its in-store payments trial at Home Depot (up from 400 PayPal employees to all PayPal users) marks a huge jump in the trial's scope—and risk. On January 19, PayPal opened up the trial to include 51 stores (up from the initial 5) and said all PayPal users could now sign up for the system. That should give both PayPal and Home Depot much more useful information on who will use the system, and how.

But PayPal's approach—which essentially reverses 50 years of payment-card advances by eliminating any physical authentication device—still presents a big challenge when it comes to security.

The expanded trial, which adds stores in northern California and the Omaha, Neb., and Atlanta areas, came less than two weeks after PayPal announced that Home Depot was testing the system.

By the way, a much-quoted Reuters report from January 20 said that Office Depot is also currently in trial with PayPal's system. It's not, and the problem was tracked down to an Office Depot exec who was discussing that chain's announced trial with Google Wallet and apparently accidentally said PayPal. It's not clear if Office Depot is indeed in talks with PayPal about a possible trial. Given PayPal's attempts to talk with a wide range of retailers, though, it's certainly quite plausible.

The Reuters report quoted Kevin Peters, president of Office Depot's North American unit, as saying that PayPal "at this point [is] in a small number of stores" and that is "because there are still some rough spots in that experience. There are some limitations on who can use it, service carriers that support that."

The part about service carriers doesn't seem to apply to a PayPal trial, but it does apply to Google Wallet. And the "rough spots in that experience" comment also is consistent with reports about Google Wallet initial efforts. A source within Office Depot confirmed that Peters was apparently discussing Google Wallet and not PayPal and that there is no current PayPal trial happening at Office Depot.

That Reuters report happened to publish the day after eBay CEO John Donahoe told an analyst call about trying the system himself at a Home Depot: "I left my wallet and my cell phone in my car," he said. "Without my wallet, without my mobile phone, on the terminal, I pressed 'Pay with PayPal.' I put in my mobile phone number and a PIN and, boom, I was done. The receipt E-mailed to my E-mail account, texted to my mobile phone and I walked out. So it was a beautiful experience."

"It's going to be a learning year," Donahoe added. "But for early trial in beta, it's a great experience and, frankly, an experience no one else can match."

Donahoe's experience matches other reports about how the system works from users who aren't PayPal or eBay employees. Ordinary PayPal users can now sign up online, which should give the trial a large influx of users to do testing (something currently missing from Google Wallet trials at some retailers).

The process is straightforward: An existing PayPal user just links a mobile phone number to the PayPal account and chooses a PIN, along with whether receipts will be sent via text message to the phone or only to the user's PayPal account. At the POS in-store, the user works through a few prompts, keys in the phone number and PIN, and then completes the transaction. (PayPal also offers a conventional magstripe card, but it's the numbers-only version that's really being tested in the Home Depot trial.)

According to Russ Jones, the editor of the blog Payments News who tried the system himself, the transaction receipt is a full receipt—not just the final amount, but line-item information (albeit in Home Depot's cryptic inventory shorthand) for each item purchased.

All that really does sound simple, and not that different from what customers are accustomed to. And that's the most worrisome part of PayPal's approach: It feels too familiar to customers, even though a major layer of security that protected them in the past is no longer there.The ability to check out with just a mobile phone number and PIN—no plastic card, NFC-enabled phone or other authentication hardware required—means anyone who can acquire that phone number plus PIN has a free shot at the legitimate customer's account.

That may or may not be a PCI issue. There's clearly no chance for a thief to steal the customer's actual payment-card information—that's something the customer never gives the retailer, so it's out of PCI scope—but the phone number plus PIN might qualify as a high-value token under recent PCI rules.

Still, even if PayPal's system passes PCI muster, there remains the disconnect between the security habits of customers and this new numbers-only approach to payments.

Right now, customers are in the habit of thinking they should be reasonably careful with PINs, but there's no reason to be paranoid about them. After all, customers have decades of experience using payment cards under the assumption that a stolen PIN without the card is useless, and a stolen card without the PIN is almost as useless. For a thief to steal both at once would be very difficult. As long as the customer hangs onto the plastic rectangle (or the NFC-equipped phone), a stranger who's looking over the customer's shoulder as he enters the PIN is no big deal.

That's the habit that thousands of PayPal users will bring into this trial. But that habit could make it very easy for a thief to casually shoulder-surf the next customer ahead in line as the full phone number and PIN are typed in.

Meanwhile, PayPal's system is designed to work with only a software change to existing POS terminals. Some of those have recessed PIN pads, making it hard for a thief to capture keystrokes with a phone camera. Others have the keys on a flat, open surface, making numbers much easier to capture.

And with a rapidly expanding PayPal in-store trial, if thousands or even millions of PayPal users suddenly decide to jump into the system—with no one to recalibrate their ideas about how secretive to be about the numbers they key into those PIN pads—the result could be widespread fraud.

Not wholesale fraud, millions of card numbers at a time by small groups of dedicated thieves, but potentially millions of casual thieves wreaking a different sort of havoc on PayPal and its users—as well as on the reputations of retailers where fraudulent transactions are performed. (Remember, the victims will know which store to blame, even if that's unfair; the electronic receipt will detail where the fraud took place.)

That's a risk of the rapid expansion of a trial, and there may be no way around it. The only reasonable candidates for reminding customers to guard their PINs right now are Home Depot cashiers, most of whom still haven't seen their first PayPal transaction. Those who have don't seem to be doing any on-the-spot customer security training.

But they may end up as the ones who determine whether PayPal's so-far smoothly rolling trial turns into a security nightmare.