The security key is actually a small electronic device, designed to clip on to a keychain, that calculates a new numeric password every 30 seconds. PayPal users who sign up to use the device will need to enter their regular passwords as well as the number displayed on the key whenever they log in to the online payment service.
"The key is really going to give users one more layer of security for their accounts," said Sara Bettencourt, a PayPal spokeswoman.
Because the numeric password changes so frequently, even successful phishers will end up with obsolete numeric passwords and will be unable to empty PayPal accounts.
"If you fall for a phishing scam and give away your user name and password...if you used the PayPal Security Key, a third party couldn't get to your account because they wouldn't have this dynamic digit," Bettencourt said.
The Security Key could be an important tool for PayPal, whose Web site is frequently spoofed by phishers looking to steal user account information.
The PayPal Security Key is being tested by PayPal employees right now, and the test will be opened up to beta users in the U.S., Germany, and Australia "in the next month or so," Bettencourt said. Later this year, the company plans to begin promoting the devices to all PayPal users. News of the new PayPal system was first reported on AuctionBytes.com.
PayPal users who want this extra level of security will be able to buy the devices for $5, but this fee will be waived for PayPal business accounts.
PayPal's device is based on VeriSign's One-Time Password Token product, which is also being tested by Charles Schwab and U.S. Bancorp.
ETrade Financial also uses a similar system based on RSA Security's SecurID tokens.
Over the past year, online financial companies have paid more attention to authentication technologies such as the VeriSign tokens, which add a second layer of authentication to online transactions. Adoption of these "two-factor" authentication techniques has been further boosted by new federal guidelines, which require stronger authentication for online transactions.
Still, phishing attacks are becoming increasingly lucrative for criminals.
Research company Gartner estimates that phishers cost U.S. financial institutions about $2.8 billion last year. The average loss per phishing attack was $1,244, up from $256 in 2005.
