PayPal is strengthening its defenses with the aid of a new Security Key. The PayPal Security Key is a small, portable password-generating key fob that was developed in conjunction with VeriSign to help protect your PayPal and eBay accounts against phishing attacks.

The device works by assigning a unique six-digit security code each time you log in to your account. You will continue to use your regular user name and password to authenticate, but you also enter the security code that the device displays. The code is synchronized with a server at the time of authentication to verify that the code is the same. Once you are finished, the code expires.

The device will give PayPal an additional and much-needed layer of protection. While not foolproof, it should help thwart phishing scams which have been a serious problem for PayPal customers.

The Security Key will cost you a one-time fee of $5.00 (fee waived for PayPal Business accounts). After that, there is no monthly fee or other recurring charges. PayPal has been testing the device for months with plans to start shipping the Security Key in early 2007.