PayPal tests a virtual debit card for use at MasterCard merchants

PayPal Inc. is testing a virtual debit card that allows PayPal customers to use their PayPal accounts anywhere MasterCard is accepted online, even if the merchant doesn’t accept PayPal.

The PayPal Virtual Debit Card will be issued by J.P. Morgan Chase and processed through First Data Corp., a PayPal spokeswoman says. The interchange fees charged to merchants will go directly to J.P. Morgan Chase, the spokeswoman says. Buyers can download the software needed for the virtual card from PayPal’s site.

With the virtual debit card, purchases are paid for with a customer’s PayPal balance. If there isn’t enough money in a customer’s PayPal account, the payment will come from the customer’s bank account, PayPal Buyer Credit or the PayPal Plus Credit Card, depending on a customer’s pre-set preferences.

When a customer is ready to make a purchase on a web site that accepts MasterCard, a notice appears on the customer’s screen asking if he or she would like to pay with the virtual debit card. The PayPal Virtual Debit Card generates a unique card number and three-digit security code and automatically populates the payment details. A new account number and code are created for each subsequent purchase. The card also automatically fills in shipping and billing information fields at checkout.

In addition, the virtual debit card offers 100% protection on any unauthorized purchases made from a customer’s PayPal account. It also features Fraud Site Alert, which warns customers if they come across a known fraudulent web site.

PayPal is expected to roll out the virtual debit card to U.S. customers by mid-2007, the spokeswoman says.

The virtual debit card is the latest in a series of efforts to expand the acceptance of PayPal beyond its eBay base. “It’s a way for our customers to use PayPal more places online,” the spokeswoman says. “It really allows them to extend their use of PayPal.”