PayPal has confirmed a data breach tied to its PayPal Working Capital loan program that exposed customers’ personally identifiable information and was linked to unauthorized fund withdrawals. The company disclosed the incident in a breach notification filed with Massachusetts regulators, stating it identified the issue on December 12, 2025, and subsequently issued refunds to affected customers. Separately, New York regulators previously fined PayPal $2 million over a different incident involving exposed Social Security numbers.
Loan Application Error Exposed Personal Data
On December 12, 2025, PayPal discovered that a flaw in its PayPal Working Capital loan application had caused exposure of customers’ PII. The Working Capital product, which provides short-term loans to small business owners using their PayPal sales history, processes sensitive financial and identity data as part of its underwriting. PayPal said the application error resulted in unauthorized access to that information, though the company has not publicly detailed the exact technical mechanism behind the flaw or how long accounts remained vulnerable before detection.
PayPal disclosed the breach in a notice of data breach dated February 10, 2026, filed with the Massachusetts Attorney General’s office. The company stated that it launched an investigation after learning of unauthorized activity and took steps to terminate the unauthorized access. PayPal also confirmed it issued refunds to customers whose funds were taken. The notification did not specify how many customers were affected or the total dollar amount stolen, leaving the full scale of the breach unclear, and it offered few technical details beyond acknowledging that a software error in the loan application process was to blame.
Unauthorized Access and Forced Password Resets
The breach involved more than just data exposure. According to the Massachusetts filing, attackers gained enough access to withdraw money from customer accounts, which is what prompted PayPal to terminate unauthorized access and issue refunds. For customers who rely on Working Capital loans to manage cash flow for their small businesses, even a temporary loss of funds can disrupt operations, payroll, and supplier payments. PayPal acknowledged the unauthorized withdrawals and said it issued refunds, but the notice did not specify the number of affected customers or the total amount taken, leaving questions about the scope and timing of the exposure.
This incident is distinct from a separate, earlier incident in December 2022 that led PayPal to reset customer passwords. That earlier event involved credential stuffing, a technique where attackers use stolen username-password combinations from other breaches to break into accounts at scale. PayPal responded to the 2022 attack by deploying CAPTCHA protections and rate limiting, along with forced password resets. The recurrence of password resets and account compromises across multiple incidents suggests that PayPal’s defensive measures have not kept pace with the volume and sophistication of attacks targeting its platform, especially as the company expands into credit products and business lending that require more extensive data collection.
New York Regulators Penalize PayPal $2 Million
Separately from the 2025 Working Capital breach, the New York State Department of Financial Services took enforcement action against PayPal over the 2022 credential stuffing incident. Superintendent Adrienne A. Harris announced a cybersecurity settlement with PayPal totaling $2 million, penalizing the company for violations of New York’s cybersecurity regulations. The violations centered on the exposure of customers’ Social Security numbers, which were left unmasked on 1099-K tax forms that PayPal generated for users, allowing attackers who accessed accounts to view highly sensitive taxpayer information.
The NYSDFS issued a detailed consent order on January 23, 2025, laying out its findings on PayPal’s cybersecurity program failures. The order described how the December 2022 event involved credential stuffing attacks, unmasked SSNs on 1099-Ks, and inadequate CAPTCHA and rate-limiting protections that made it easier for automated login attempts to succeed. It also documented the forced password resets PayPal implemented in response and concluded that the company failed to maintain a cybersecurity program reasonably designed to protect sensitive personal data. For a platform that positions itself as a secure intermediary for online commerce and tax-related reporting, a regulator’s formal determination of inadequate safeguards is a significant reputational setback.
Regulatory Standards and Growing Scrutiny
The New York action underscores that financial technology firms are increasingly being held to the same standards as traditional banks when it comes to cyber risk. Under the state’s cybersecurity rules, covered entities must implement controls such as multi-factor authentication, monitoring for anomalous activity, and secure development practices for applications that handle customer data. By finding that PayPal fell short of those obligations, the consent order signals to other fintechs that rapid product rollout is no defense if basic protections around login security and data masking are missing. It also suggests that regulators will revisit past incidents when evaluating whether firms have learned from earlier breaches or allowed similar weaknesses to persist.
New York’s framework, administered through the DFS supervisory portal, has become a reference point for how state-level regulators can push companies to harden their systems. In PayPal’s case, the combination of credential stuffing and unmasked Social Security numbers on tax forms presented a textbook example of how multiple modest oversights can combine into a serious exposure. With the Working Capital incident now on the record in Massachusetts, regulators and customers may look more closely at how PayPal configures its lending and tax-reporting tools and whether similar design or monitoring issues exist elsewhere.
Pattern of Security Gaps Raises Broader Concerns
The two incidents, separated by roughly three years, reveal a pattern that should concern PayPal’s user base. In 2022, attackers exploited weak authentication controls to access accounts and view unmasked Social Security numbers on tax forms. In 2025, a software error in the loan application process opened a different door to customer data and funds. These are not the same vulnerability, but they point to a recurring theme: PayPal’s rapid expansion into financial products like lending, tax reporting, and business services has introduced new attack surfaces that its security infrastructure has struggled to cover. Each new feature that requires storing or transmitting sensitive data becomes another point where a coding mistake or configuration error can have real financial consequences for customers.
The $2 million fine from New York regulators is modest relative to PayPal’s revenue, but the reputational cost compounds with each new disclosure. Small business owners who use Working Capital loans trust PayPal not just to process payments but to safeguard their financial identities and access to operating capital. When a loan application error can expose personal information and allow funds to be drained, that trust erodes. PayPal’s decision to issue refunds addresses the immediate financial harm, but it does not answer the harder question of whether the company’s security investments match the complexity of the financial products it now offers. With formal findings of cybersecurity shortcomings in New York and a documented breach in Massachusetts, PayPal faces mounting pressure from regulators and customers alike to demonstrate that its internal controls, software development practices, and incident response capabilities are evolving fast enough to keep pace with the threats aimed at its platform.
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*This article was researched with the help of AI, with human editors creating the final content.
