The PayPal Security Key, developed in conjunction with VeriSign, generates a new six-digit password every 30 seconds. The password is synchronised with a server that is able to verify that the code is the same at the time of authentication.
PayPal is planning to allow customers to use the key fob as a more secure log-in to their account and to help prevent phishing attacks.
The device will be free for eBay customers with a business account but will cost $5 for personal PayPal users. If the key is lost, users will have to go through a new verification procedure before they can access their account.
PayPal said that the technology is not foolproof and should be seen as just another layer of protection.
If fraudulent parties get hold of a username and password, customers could feel safer in the knowledge that thieves would not have the six-digit code.
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