DFS Discover Financial Services

PayPal said Thursday the financial information of customers using its in-store payments service is safe a day after a Visa Inc. (V) executive suggested it lacks security.

The comments underscore the high stakes traditional credit-card companies are placing on digital payments, a market also being targeted by the likes of technology companies Google Inc. (GOOG), PayPal parent eBay Inc. (EBAY) and Verizon Wireless. PayPal is testing a service in some Home Depot Inc. (HD) stores that allows customers to make purchases by typing in their mobile phone number and a personal-identification number. Visa is testing its own "digital wallet" service that could be used to make purchases online and on mobile devices.

"I think there's real issues around security," Jim McCarthy, global head of product at Visa, said Wednesday of PayPal's new service at a Goldman Sachs conference in San Francisco. McCarthy suggested someone could gain access to a customer's personal information when using PayPal to make a purchase in a physical retailer.

PayPal began testing a service in January that allows its customers to make purchases with their PayPal accounts in stores instead of swiping a card or handing over cash. The customer can facilitate a transaction by typing in their mobile phone number and a PIN into the merchant's terminal. The service is available in 51 Home Depot stores, and PayPal expects to expand it to 2,000 Home Depot stores next month, according to Anuj Nayar, a spokesman for PayPal.

"PayPal is leading payments innovation for frustrated merchants and consumers limited by legacy systems and approaches," Nayar said in an email Thursday, adding the company is "responding today to what merchants and consumers are crying out for."

"With PayPal, your financial information can't be lost or stolen from your wallet, your card or on your phone," Nayar added. "It's safer in the PayPal digital cloud than in your pocket."

A spokesman for Home Depot said Thursday the company would "never venture into something we didn't believe is secure for our customers." A customer using the service receives an electronic receipt on their mobile device after making a purchase.

"If a fraudulent purchase were made, the customer would know almost immediately," the spokesman said.

McCarthy on Wednesday gave an example of someone watching a customer entering her mobile phone number and PIN to conduct a transaction, thereby gaining access to the customer's PayPal account. He also questioned whether PayPal has the technological infrastructure to handle a high volume of payments. "We're now capable of doing 20,000 transactions a second in real time," McCarthy said, adding he doesn't think PayPal is "capable of doing what we're doing at scale."

PayPal processed more than 5 million transactions a day and about $120 billion in global online payments volume in 2011, Nayar wrote Thursday. "We are confident that we can scale PayPal innovation to meet the potentially exponential growth in transactions that we may see from offline retail."

Visa and competing credit-card networks MasterCard Inc. (MA), American Express Co. (AXP) and Discover Financial Services (DFS) face a slew of new competitors that are pushing or developing services that would allow consumers to use software-based programs to buy goods at brick-and-mortar merchants and online. While many of the services would allow customers to fund accounts with existing credit cards, they also risk diverting transaction volume away from the networks.

PayPal, primarily a service for paying for goods on desktop and mobile websites, allows customers to fund their accounts through existing bank accounts as well as cards from Visa, MasterCard, American Express and Discover. About half of transactions made with PayPal are funded with cards, according to analysts.

Rod Bourgeois, an analyst with Sanford C. Bernstein & Co., wrote in a research note Monday that PayPal isn't likely to gain "significant payments volume" in physical merchants in the next couple of years. However, PayPal is likely to compete with traditional card companies by undercutting fees, known as interchange, that merchants pay to accept the traditional networks' cards.

"We see PayPal partly as a pawn that merchants can use to exert pressure on" Visa and MasterCard "and the interchange rates they control," Bourgeois wrote.

Visa and MasterCard set the rates, but the fees are collected by the banks that issue their cards.

"We intend to offer competitive pricing to merchants at greater value compared to the existing legacy providers and potential PayPal imitators," Nayar wrote.

Visa and other card companies are developing their own mobile- and online-payment services.

Visa is preparing to roll out V.me, a service that would allow customers to pay for purchases on mobile and traditional websites by entering a username and password instead of typing in their card number for every transaction. The software would allow customers to fund purchases with their Visa-branded cards as well as those from other networks. Eventually, V.me could be used to make purchases with mobile phones at physical merchants using a technology called near-field communication, or NFC, which would allow a customer to tap a smartphone against a contactless terminal to complete a transaction.

Visa Chief Executive Joe Saunders said last week the company will be testing the service with a "few brand-name merchants" in the coming weeks and is in discussions with more than 100 major merchants about further tests.

Visa has also said it will work with Google, which rolled out its mobile-payments service Google Wallet on some Android smartphones last year, as well as Isis, a competing service being developed by AT&T Inc. (T), T-Mobile USA and Verizon Wireless. Currently, consumers can use some MasterCard-branded cards issued by Citigroup Inc. (C) to fund Google Wallet.

-By Andrew R. Johnson, Dow Jones Newswires; 212-416-3214; andrew.r.johnson@dowjones.com

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