Background: PayPal.com is a pioneer in online Person-to-Person (P2P) payment services. On a typical day, PayPal processes more than 150,000 transactions. The average transaction that the company processes is about $50. So far, the company has issued about $5 million customer accounts.

To open a PayPal account, a customer provides basic personal information, such as name, address, phone number, and e-mail address. Then the customer can send a payment to anyone else via e-mail by inserting a dollar figure into an electronic form at the PayPal Web Site (Http://www.paypal.com). When the customer sends the e-mail, PayPal automatically charges it to the sender's credit card or bank account.

PayPal is also one of a growing number of C2C online auction transaction payment services. These services have proliferated as more people purchase goods and services at C2C auction sites, because they simplify the task of finalizing payments from winning bidders to the sellers of items placed into auction.

Confronted with this case and numerous other frauds perpetuated on its customers, PayPal faced a dilemma. On the one hand, reversing its policy and reimbursing customers who experience fraudulent transactions would have entailed incurring significant expenses to track down fraud perpetrators and to file charges. That, of course, was the reason it had established the policy in the first place. On the other hand, continuing the policy would have risked a loss of faith on the part of its customers. The ultimate lemon problem of fraud threatened the company's future.

Ultimately, the company decided that retaining its customers was crucial to its future prospect. Thus, PayPal became the first online P2P payment company to guarantee that it would stand behind all P2P transactions. Not many other firms in this industry offer similar transaction guarantees.

Questions:

a)Why is fraud a potentially significant lemons problem in e-commerce?

b)What are some potential solutions?