PayPal vs. credit cards: Which is the way to pay?

By Michael Lloyd

An ever-increasing number of retailers offers the world's largest online payment service when checking out: PayPal. Many people assume that one payment method is just as good as the other -- and that's often true. But there are some differences.  While you may not lose the basic benefits of a credit card when you use PayPal, you should be aware that the two are not exactly the same.

Personal information security
The whole idea behind PayPal is that when you use it to make a purchase online, the merchant you're buying from won't see your card details. It will receive your funds directly into its own PayPal Business account without setting eyes on your card number, expiry date or security code.

This feature not only protects you from unscrupulous vendors, but it also makes it less likely that thieves will intercept your card details via an unsecured internet connection. paypal-vs-cc

"We know from the very early days of PayPal that one of the things consumers most value is the fact that they are not sharing their card information with vendors when using the service," says PayPal UK public relations director Rob Skinner. "We found this gave people the confidence
to shop online. Time and time again our research has shown that this is particularly important to consumers."

However, a Visa spokesperson said in an emailed response to questions, Visa has a multi-layered approach to security, too. Its online wallet, Verified by Visa, allows you to store your payment information and pay for purchases without ever giving merchants your credit or debit account numbers. It has proven successful at keeping fraud levels low, Visa says.

Choosing whether to use such a service or PayPal may come down to preference.

Purchase protection
If you fund a PayPal transaction with a credit card, you'll lose your Section 75 rights. Section 75 of the Consumer Credit Act says that your card issuer will be jointly liable with the supplier, should there be a problem with an item or service that costs between £100 and £30,000. When paying with a credit card, you can apply directly to your card issuer for a refund if you have issues with the seller.

However, this only applies to direct payments made with your card, not those made through intermediary services such as PayPal. Therefore, you won't be able to make a claim under your Section 75 rights when using a credit card to fund a PayPal transaction.

PayPal does offer its own Buyer Protection programme that safeguards users in the event that something goes wrong, Skinner explains. "This gives consumers protection against unauthorised transactions in the event that an item doesn't arrive, and when an item doesn't match its description," he says. "This protection applies regardless of how a user funds a transaction, be it through a credit card, debit card or bank account."

There's also no transaction minimum to be eligible for PayPal's Buyer Protection programme like there is with Section 75. However, with the PayPal protection programme, you must make a claim within 180 days of your purchase; Section 75 poses no such timeframe.

Most credit cards also have their own protections beyond those required by law. "Visa Europe's consumer protection [chargeback policy] also means consumers can seek to claim their money back if they are an innocent victim of fraud, they do not receive the goods, if the goods are lost or if they received the wrong goods, subject to their bank's terms and conditions," the Visa spokesperson said.

This chargeback policy is similar for most credit and debit cards.

Protection against breaches and hacking
Last May, PayPal owner eBay was forced to ask its users to change their passwords after hackers compromised some 145 million accounts . Yet one analyst says PayPal itself has yet to suffer a major breach, thanks to the transaction service's robust cyber defences.

Credit card issuing banks haven't been as lucky. "Although banks have a high reputation of investing a lot in cybersecurity practices, recent incidents [such as] the JP Morgan breach [in the US], have demonstrated that, regardless how much money you throw at cybersecurity, there's always a chance of being hacked if you're worth the trouble," Liviu Arsene, senior e-threat analyst at anti-virus software firm Bitdefender, said in response to emailed questions.

"PayPal, on the other hand, has never been breached (so far) and has been claiming that they've been using the highest level of commercially-available encryption on your personal data," Arsene said. "More than that, they even have a bounty programme where they reward [people who] report vulnerabilities in their systems, while banks don't have this practice."

Despite all the protections PayPal has in place, all a fraudster will need to access your account is your PayPal email address and your password. A cybercriminal may have problems getting this information from PayPal's servers, but being careless with your information could leave you vulnerable.

And while your credit card information could be compromised by hackers, card providers have extra protection in place designed to stop them from using that information. "[Our] barriers are underpinned by systems like Real Time Scoring that assess the likelihood of fraud on any given transaction and industry initiatives ... that set rules on how data should be stored and encrypted," said Visa's spokesperson. "The combination of these barriers makes it difficult for fraudsters, even those who obtained elements of card data, to put it to use."

Although not all online merchants accept PayPal, Skinner reckons one of the major advantages it has over credit cards is convenience.  

"It's incredibly convenient because I can make a payment online without having to wander around searching for my wallet to dig out my card details," Skinner says. "It's a very convenient way to pay, particularly as we are increasingly using mobiles to make purchases, making [PayPal] even more compelling."

Credit card rewards and PayPal
Skinner says you can combine the benefits offered by your card issuer with those provided by PayPal by using the former to fund the latter, but this might not always be the case. You won't qualify for some types of credit card rewards when you use your card to fund a PayPal transaction.

For instance, if you're using a credit card that offers points or cashback only when you shop at department stores, you typically won't receive your benefits if you use PayPal. The same will be true if you're using a card that only offers cashback on utilities or travel spending.

See related: 6 ways to reduce your risk of financial fraud, Could mobile payments replace your plastic?

Published: 23 June 2015