This essay was first published in "Data: Towards a new age of economic enlightenment," a landmark report by the Official Monetary and Financial Institutions Forum, available here.
Usman Ahmed, Head of Public Affairs, and Ivy Lau, Lead Manager of Public Affairs and Strategic Research
The pandemic accelerated the pace of digitalization, with almost one out of every five dollars of retail sales now being spent on e-commerce platforms around the world. The staggering growth of online spending highlights the importance of responsible innovation in data science, a key factor in the continued expansion of a secure global digital economy.
The landscape of technology-enabled illicit behavior is ever-evolving and fraudsters of the Covid-19-era have exploited the expanded opportunities for identity theft, fraudulent accounts, and transactions, as well as hacking. Juniper Research has estimated that payments fraud will cost businesses $206 billion between 2021 and 2025. Companies have a responsibility to invest in systems and processes that enhance the safety and security of payments to fight these threats.
In line with regulatory expectations to keep payments secure and subject to the requirements of applicable laws, PayPal, as a global financial services provider, uses information about customers’ spending patterns, behavior, location, and more to help reduce the risk of fraud. Our data science infrastructure enabled the processing of an average of $3.4 billion and 53.3 million transactions per day (36,987 transactions per minute) in the third quarter of 2021.
We employ real-time data and account monitoring (for instance, cross-referencing an Uber payment in Sydney that takes place three hours after a Venmo transaction initiated in San Francisco by the same user) in combination with analysis of static data (birth date) and red flags (spending amount) to help identify, authenticate and protect users. Our data and risk models enable us to offer buyer and seller protection programs to help protect consumers and merchants from fraud and counterparty nonperformance. Innovations in data science to improve risk management practices and systems have enabled PayPal to achieve a transaction loss rate of only 0.09% in 2021’s third quarter.
Data are a powerful tool that threads the needle between speed, safety, and convenience for merchants and consumers who use our platform. Data models enable enhanced onboarding experiences that offer expediated communication and authentication. PayPal conducts hundreds or even thousands of risk checks during transactions in a matter of seconds. This allows customers to pay with the peace of mind in only a few taps or clicks, and retailers can boost authorization rates and minimize the number of failed legitimate payments without adding friction to checkout flows or compromising the customer experience.
Cryptographic techniques enable data to be used in a manner that enhances experiences while maintaining privacy and security. Internally, our data practices are combined with thoughtful company policies to ensure data are being used in the right way. Externally, PayPal works with Visa, Mastercard, Discover, and American Express on network tokenization, successfully tokenizing more than 650m customer cards, which helps protect card details throughout the payment ecosystem while also keeping them up to date.
Collectively these data tools improve authorization rates and enable businesses to generate more revenue and create a seamless customer experience. Businesses, in particular small businesses, without dedicated in-house data capabilities are the largest beneficiaries of these data tools being leveraged by the payments industry.
Data play an essential role in helping to shift payments companies’ approach to anti-money laundering and countering the financing of terrorism from a reactive to a preventative and risk-based paradigm. Companies can triangulate static data elements and dynamic account monitoring to go beyond merely reacting to criminal activities as they arise and instead proactively prevent illicit actors from accessing the financial system. PayPal's customer due diligence program collects certain identity details at sign-up while remaining relatively frictionless for the user.
Once certain thresholds are met, in compliance with applicable laws and regulations, PayPal subjects users to additional know-your-customer requirements for identity verification. In addition, PayPal screens accounts and transactions on a nightly basis. By cross-referencing internal data against a variety of data elements and sources, we work to help ensure that we meet our compliance obligations and earn trust from our users.
Additionally, data can be used to provide, test, and improve services. Aggregate de-identified information about how our products and services are used is analyzed to generate insights to improve our offerings.
In other instances, such as PayPal Working Capital, data have made new products possible and financial services more accessible to those who are underserved. Instead of traditional consumer credit checks, PayPal Working Capital loans are primarily based on the PayPal transaction history of a business. PayPal Working Capital has been able to provide greater access to capital to many businesses whose creditworthiness has historically been difficult to measure by traditional credit checks – women, newer firms as well as those based in rural areas, low-moderate income census tracts, and areas with higher concentration of underrepresented communities.
This expansion of access is one of the key benefits of enhanced data analytics. Innovations in data science are responsibly deployed when rigorous privacy-first principles, policies, and procedures are integrated at all levels of products and operations. A robust privacy program – built on principles of accountability, proportionality, data minimization, transparency, and control – is an essential foundation for companies to achieve the necessary and appropriate balance between privacy protection and the strategic use of data – to verify identity, detect and reduce fraud, process payments and facilitate the growth of the digital economy. Companies that innovate and deploy their data tools to optimize this balance will help earn the trust of users and regulators. That is what PayPal strives for.
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