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Despite New Laws, Expect More Sites Dedicated to Online Shopping for Kids

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The relatively new site Virtual Piggy looks to benefit from changes in the COPPA law.

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MINYANVILLE ORIGINAL Not too long ago, learning about spending and saving as a child meant putting extra money in a piggy bank and figuring out how to balance a checkbook. Now, the growth of the online marketplace presents new hazards for children and teenagers, most of which go undetected by parents.

Smartphones and the expansion of mobile networks, especially, have become a double-edged sword. Children can access the Internet more easily, but parents have to worry about their children releasing personal and financial information to cyber criminals.

Major security firms like Intel (NASDAQ:INTC) subsidiary McAfee and Trend Micro (PINK:TMICY) have predicted that mobile device users will see an unprecedented amount of hacking and indentity theft this year. In 2011, 9 million people had their identity stolen. James Ryan, Vice President of Marketing at the Internet-security firm AnchorFree, shares the view of McAfee and Trend Micro (((what view?)))(fixed), telling Minyanville, "The criminals tend to follow the opportunity. The opportunity is stealing data from people using mobile devices through unsecured Internet connections."

According to eMarketer, the time individauls spend on mobile is growing 14 times the rate of the desktop, and Flurry (via TechCrunch) released a report last month stating that mobile users in the U.S. spend an average of 127 minutes per day on apps, up from 94 minutes in 2011.

Over 100 million individuals under 21 in the U.S. spend $50 billion online each year (((acording to who?)))),

Dangers also lurk for teenagers (expand upon this; add $50 billion stat) when they engage in something as simple as using their parents' or family's personal information (((but what do you mean by children here? most children do not have a bank account they can use to buy things online; what age group do you mean?)))(Does this work?) to buy a product. The information may illicitly switch hands to unknown third parties.

Until last month, the Children's Online Protection Policy Act, or COPPA, passed in 1998, did not address the particular threats of today's mobile space. The Federal Trade Commission, or FTC, tackled this issue on December 19 when it updated the Children's Online Protection Policy Act, or COPPA. The original law mostly dealt with online websites and their ability to collect, distribute, or use the personal information of children under 13. (View the COPPA law here.)

Now "personal information" that cannot be collected includes children's photographs, video, and geographical information. Also, kid-directed apps and websites must seek parental permission before third parties can collect information about children via plug-ins, such as Facebook (NASDAQ:FB) "Like" buttons, and ad networks.

However, companies only have to adhere to this ban on personal information gathering if they possess "actual knowledge" that their website or app collects information about children. (((MEANING WHAT -- explain which types of sites would still be able to get around the regulations.)))(fixed)

Additionally, parental consent is required before collecting Protocol addresses and mobile device IDs, which can be tracked over time and across multiple websites. Plus, companies may only use this information for internal purposes. Of course, (((How would sites know that it isn't a parent using the protocol address or whatever?)))(add the loophole)

According to Bloomberg, FTC Chairman Jon Leibowitz believes the changes "strike the right balance between protecting innovation that will provide rich and engaging content for children, and ensuring that parents are informed and involved in their children's online activities."

Even before the laws go into effect on July 1 of next year, a few companies already have begun to capitalize on the demand for better online protection for children and teenagers.

One such company is Virtual Piggy (OTC:VPIG), a provider of online security platforms for children and teenagers that launched in 2008. (fixed)Founder and CEO Jo Webber, Ph.D. created Virtual Piggy as a free service for parents to monitor and control how their child or teenager shops online. The company aims to create a safe environment where the under-21 demographic can learn how to spend and save. (((According to its own website? If a quote from her, I wouldn't use it -- sounds too PR-ish.))) (fixed)

Webber saw a market to fill before she and her company became aware of COPPA. According to a Harris Youth Poll Study (((from what year?))), kids have over $200 billion in total spending power. Yet, no credit provider will trust a teenager or a child with a credit card, but online retailers have designed the online retail system for payment primarily through credit cards. The under-18 demographic lacks a way to transact online by themselves in a safe way. Virtual Piggy created its service as a solution to this problem. (((avoid "highlighted" unless you really need it -- it doesn't sound natural)))(shifted the paragraphs around. Does this work?)

Parents create an account on Virtual Piggy and establish allowances, spending limits, and notification controls. Parents also determine at which of the over 80 of Virtual Piggy's merchant-partners a child may shop.

At the time of purchase, a child checks-out using Virtual Piggy by selecting it as a payment option. If a merchant has integrated Virtual Piggy, it appears as a payment option. Virtual Piggy then checks if the purchase is parent-approved. If so, Virtual Piggy forwards the necessary billing and shipping information to the company. The child never inputs his or her (((his or her))) (fixed) name, email address, credit card number, or address.

In simple terms, Virtual Piggy functions as a "family wallet."

Virtual Piggy also operates on mobile devices. Webber said, "I think Virtual Piggy is one the safest and simplest ways to make a transaction on a mobile device," and the payment mechanism functions the same as it would on desktop computer.

(((the use of "and" here is awkward))) (fixed) Virtual Piggy generates revenue by licensing its service to merchants to help them become COPPA compliant.

The company complied with the recent COPPA amendments even before the FTC officially passed them. Webber said (((normally we use present tense for our own interviews, makes it more exciting))), "We built our system from scratch to be above and beyond COPPA," says Coppa. "Our system is the only technology in the world where a child can transact anonymously under the conditions established by the parents. That anonymous transaction capability is what makes Virtual Piggy COPPA compliant."

Virtual Piggy has a tight integration with Paypal, and the FTC has just classified Paypal as an "alternative payment system," which means the FTC views Paypal as a secure payment system and allows its usage as a means of obtaining verifiable parental consent. (((Can you say this in a more conversational way, and avoid repeating "payment system.")))

When asked if they've been in talks with major online retailers like Amazon (NASDAQ:AMZN), Webber said Virtual Piggy has been in talks but she could not divulge the information nor could she mention specific retailers.

(Make this a separate section?) (((yes, give a new subhed -- let's make a sidebar at the end of the story))))(fixed)

Protecting Your Child's Internet Connection

Parents have to worry, in more than one way, where their children shop and browse the Internet. Hacking and indenity theft occurring while using an unsecured Internet connection poses one of the biggest cyber risks in 2013, according to Ryan of AnchorFree (((reintroduce by referring to his company))). (fixed) Without a protective service, someone's Internet activity is visible to hostile eyes.

(((what is this? where based? Add "Ryan's company..."))) (fixed) Ryan's company provides Internet users with a virtual private network, or VPN, through its software Hotspot Shield, which protects a family's Internet connection when on a mobile device. The software provides a "secure tunnel" to the Internet, which is a protective barrier that blocks hackers from accessing your browsing traffic. It encrypts your content as it passes from your mobile device to the server. He emphasized that anti-virus security software, such as Intel's (NASDAQ:INTC) McAfee service, protects your device but not your Internet connection.

(((I would lose as much of this as possible -- it's starting to read like advertorial for Hotspot))) Hotspot Shield also protects against malware. It detects malware phishing and spam sites and notifies individauls when they arrive at the site. AnchorFree has a database of 2.5 million potential malware sites. Hotspot Shield intercepts malware packets as they are downloaded to a mobile device from a potentially victimizing website.

Ryan says (((see note about tense))) (fixed) many people do not use their devices cautiously when connected to a public Wi-Fi or another unprotected Wi-Fi network. He specified, "Hackers can download opensource software and hack into the open Wi-Fi network and access your data stream while you browse. This includes shopping, logging into Facebook, or sending emails."

Currently, over 100 million people have downloaded Hotspot Shield around the globe.

Facebook's login credentials will likely become a favorite target of hackers and indentity thieves, says Ryan. As more websites leverage the login credentials of Facebook, a cyber criminal can acquire these credentials and access all the connected sites and services, stealing the information

To minimize the risk of hacking and indentity theft, Ryan recommended not accessing important and personal information, such as an online bank account, on a mobile device when in public. Tasks invovling sensitive information should be done at home or in a secure location.

Hotspot shield cannot stop individuals from inputing information, and it does not have a parental notification system. This is where a service like Virtual Piggy makes its money. Hotspot Shield focuses primarily on the protecting a user's Internent connection.

Reactions to COPPA Amendments

The amended COPPA law aligns with Virtual Piggy's mandate, and Webber holds a favorable view of the law, calling them "common sense laws."

Webber, though, described the amendments as "softer" than expected and had anticipated "harder" changes for the industry.

In particular, Webber anticipated an elimination of the ability for companies to obtain parental consent via email. The FTC originally worried about the ease in which children can circumvent this parental check. She provided the example of a child creating an email account and claiming the account belonged to his or her parents to play a game on Disney (NYSE:DIS) without his or her parent's knowledge and unbeknownst to the website. However, Webber highlighted the FTC found no evidence of harm caused by this method and decided a change in the law would have been "inappropriate" (ends here), placing a heavy financial burden on the industry to develop an alternative way to obtain parental consent. Plus, apps and websites that procure consent via email can only use the data for internal usage and can't legally share the information with third parties. (((Where does this quote end?)))

Others hold a less favorable view of the changes and had hoped for more stringent measures from the FTC. The Wall Street Journal reported several members of Congress, such as Senator John D. Rockefeller IV, will push for stronger strong online privacy laws. Rockefeller is leading the Senate's extensive investigation into the data industry. Jeffrey Chester, executive director of the Center for Digital Democracy said "the FTC's decision was a step in the right direction but left loopholes for companies to mine kids' data inappropriately."

Many parent advocacy groups had hoped for removal of email as a legal method of obtaining parental consent, according to Webber.

Impact on Businesses

The merchants partnering with Virtual Piggy have reached out to the company for advice on how to implement the new laws and how Virtual Piggy will handle the new COPPA. Webber predicts adjusting to the new advertising rules will prove the most burdensome for websites. Websites that have children as their main audience bear responsibility if advertisers collect children's identifiable information. She explains ((Changed tense))), "The FTC will not go after the advertisers, it will go after the website operators. This means websites that do cater to children will either have to eliminate advertisements or scrutinize the ads that go on their website to make sure the ads don't solicit children for identifiable information."

Some app developers worry about the impact on their businesses caused by changes in the COPPA laws. The Wall Street Journal article also mentions ((Changed tense))) Joe Potter, president of the Application Developers Alliance, who said "that talented and responsible developers will abandon the children's app marketplace." According to ChannelNewsAsia, the mobile application industry grew by by 68% from $8.5 billion in sales to $14.3 billion last year.

Webber and many others believe that larger app providers should be more tightly regulated, though, because, as Ryan says, the development of the app community has been akin to the Wild West. (((Delete: the Wile West line says it already.)))

Webber mentions Apple (NASDAQ:AAPL), which has found itself with some lawsuits due to the apps in it stores that encourages children to input identifiable information and participate in unreasonable transactions. The FTC, however, exempted Apple and Google (NASDAQ:GOOG) from responsibility for privacy violations committed by the apps developers. Webber said, "Some of the biggest companies in the world are still able to get around the laws."

Ryan anticipates further "governmental and parental backlash" in the form of additional legislation aimed at app developers, particularly against developers of kid's apps and kid's developers, if developers don't take more responsibility with the data they capture from their apps. Last month, the FTC ordered data brokers to reveal the information they have collected on online consumers.

Trends in the Security Industry

(((Rephrase -- let's discuss.))) Minyanville investigated Virtual Piggy's claim of being the only service of its kind, and it appears to be true. Andrew Schrage of MoneyCrashers confirms this, stating, "Other sites that feature virtual piggy banks do exist, but none offer the ability to restrict purchases."

The absense of major competitors in this niche indicates that, despite the ubiquitous stories of identity theft and payment fraud, major companies have been slow to offer secure payment services in the changing digital landscape. Virtual Piggy is a relatively small company with a market cap of $92.23 million.

One service not too far removed from Virtual Piggy is BillMyParents (OTC:BMPI). Like Virtual Piggy, BillMyParents allows parents to control their children's spending. BillMyParents operates in the realm of prepaid cards, though. The service notifies parents whenever a child makes a purchase. If parents don't like the purchase, they can deactivate the card.

The card from BillMyParents appears to allow more flexibility than Virtual Piggy as children can shop at most stores, minus obvious taboos, such as liquor stores.The strigency of Virtul Piggy does have its upside, though. Through Virtual Piggy, parents can prevent unwanted purchases before they happen. The prepaid card only notifies parents after something questionable has been purchased.

Larger financial institutions will likely start breaking into the prepaid card market. Unlike Virtual Piggy, BillMyParents charges a monthly fee of $3.95, and household names, such as American Express (NYSE:AXP) and JPMorgan (NYSE:JPM), want a slice of the multi-billion dollar prepaid-card market. BillMyParents will try to fend off competition and cement itself in U.S. households by partnering with Justin Bieber ((r(this bit of colour should be mentioned higher up and can be said in a more natural, conversational way))). (See also Would You Give Your Kids a Justin Bieber Debit Card?)

(((Let's discuss -- feels like this could be a different story))) In the realm of Internet protection, major tech companies have so far lagged behind smaller tech firms like AnchorFree in developing VPN software and protection. The company has focused on Internet focus for serveral years. Ryan elaborated:

The big anti-virus companies like Intel's McAfee have started to recognize that a big shift is occurring from needing to secure people's hardware to needing to secure people's Internet connection and their interaction with the Cloud as more services move to the Cloud. In the competitive sphere, we will see large companies jumping into the Internet security space, Cloud security space, and the online privacy space.

As cases of cyber crime become more severe among children, expect to see companies racing to provide the best products to meet the demands of anxious parents.

Twitter: @ChrisWitrak
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