Brian Krebs’ recent experience highlights PayPal’s insecurity. The convenience and ease of use of PayPal give them a wide customer base, but their inherent untrustworthiness has long been reason for concern. For as long as I’ve used the service, I’ve been concerned about external attacks, like what Krebs experienced, as well as the internal threat – PayPal themselves have a history of freezing and diverting their users’ funds. Both of these concerns can be addressed via a proxy bank.
In 2008 I opened an online checking account with a new bank, completely separate from the financial institutions I normally use. The account has no “overdraft protection” or any line of credit. As with my PayPal account, I keep no money in the checking account. This checking account is the only account I associate with PayPal. When I want to make a purchase via PayPal, I transfer the needed funds from my primary financial institution to the checking account at the proxy bank. Since banks still subscribe to the archaic notion of “business days”, this transfer can sometime take up to week, but more frequently completes within 2-3 days.
The brief wait period is acceptable to me (it certainly reduces the ability to impulse buy) and gives me a level of security that otherwise cannot be achieved with PayPal. If someone breaks into my PayPal account, there’s nothing for them to steal. Even PayPal themselves have limited ability to steal funds. If an attacker is lucky, they may gain access to the account when I’m transferring funds in preparation for a purchase. My PayPal transactions are typically low-value, so at most this lucky attacker will acquire $100 or so. That’s an acceptable risk for the convenience of PayPal.
In the past I used this multilayer approach for all online purchases. A debit card from a proxy checking account at a different bank with no access to my primary accounts was the only thing I would use to make online purchases. When the account was compromised, the wait period for a new card wasn’t the inconvenience it normally is, since it had no impact on my day-to-day spending with my primary accounts. I think this type of security is required for shopping online, but responsible use of a credit card can offer acceptable protection for non-PayPal transactions without the hassle of a proxy account.