Friday, March 09, 2007

Consumer Report on Virtual Wallets

Illustration of computer
Illustration by Bob Eckstein

Uneasy about spreading your credit-card number around the Internet as you go about your holiday shopping? Several services, including PayPal and Bill Me Later, can offer added security in an electronic world vulnerable to credit-card fraud and identity theft. But they’re far from foolproof.

The services are convenient. You register just once with each. Then, whenever you buy something from a participating merchant, you merely click on the service’s icon and the transaction speeds through, without your having to retype your personal data. The service pays the merchant by billing your credit card or by dipping into your bank account. For buyers, all the services are free.

Beyond that, each one works a little differently. Here are some basic types:

Auction payment services. To pay for auction winnings or to deal with a small retailer, most likely you’ll use PayPal, BidPay, or a similar payment service. PayPal bills your credit card or withdraws the money from your bank or out of your PayPal cash account.

Checkout services. Google Checkout is the newest, but individual retailers like Amazon have long offered express check­out. When you click on an icon, your purchase is billed to your credit card. Google search results now show a shopping cart under a company’s name if the retailer participates.

Credit accounts. Bill Me Later instantly checks your credit worthiness after requesting the last four digits of your Social Security number, your address, and birth date. The service sends the first bill by mail, but you can pay subsequent bills electronically. As with credit cards, you’re subject to late fees and interest charges, currently 18 percent.

Buyer beware

If you use a credit card for purchases through any of the payment services, you get the same protections as if you paid with your card directly.

But using a bank or cash account for online purchases is riskier. Federal law entitles you to a credit for returns, damaged goods, and missing shipments bought with a credit card. It also limits your liability for fraudulent charges to $50. Those protections don’t apply if you pay from a bank or cash account. You’ll have to haggle with the bank or payment service for redress.

Online payment services promise some protections, but they’re not required by law and could change. Bill Me Later says customers aren’t responsible for any fraudulent charge. If there’s a dispute, PayPal will cover a buyer for up to $1,000 if buyer and seller can’t reach agreement through its resolution program. But you’re out of luck if you bought more than $1,000 worth of stuff.

(Last fall, without admitting to any wrong­doing, PayPal agreed in a settlement to pay $1.7 million to 28 states. It also announced a separate proposed settlement for $3.5 million in a class action that found the company hadn’t adequately disclosed its policies to customers. One problem: Customers with more than one account on file didn’t always realize their bank account rather than their credit card would be tapped first for purchases. Now PayPal must conspicuously disclose that policy.

Before signing up for any of the services, heed this advice:

  • Use a credit card to make payments to the services. You’ll have more protection.

  • Never click on links in e-mail that appears to be from payment services, especially if it asks for confidential information. And don’t reply. If you do, you might become a victim of phishing, a scam designed to cull sensitive personal data.

  • Look for a lock icon at the bottom of a company’s Web site page, indicating that it has been encrypted.

  • With the Verified by Visa or MasterCard SecureCode programs, you can skip the payment services and use your credit card online with an added password protection. (See the companies’ Web sites for details.)

You can go cardless

Online shoppers have many electronic options for paying. The services below are three of the larger players. PayPal and Google require you to sign up at their Web sites. You can register at Bill Me Later when you’re ready to make your purchase. All have been vetted for credibility and trust by Consumer WebWatch, a project of Consumers Union, nonprofit publisher of this magazine.

Service Major online merchant partners
Bill Me Later Wal-Mart, eCost, Dick's Sporting Goods, Bluefly, Overstock, KB Toys, Cabela's, TigerDirect, American Girl,
Google Checkout uBid,, Bluefly, eCost, Ritz-Camera, Starbucks, Dick's Sporting Goods, Timberland
PayPal eBay, Dell,, Hotwire, iTunes, TigerDirect, Starbucks, Skype, Ritz Camera, H&R Block,

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