Take On Payments

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Take On Payments, a blog sponsored by the Retail Payments Risk Forum of the Federal Reserve Bank of Atlanta, is intended to foster dialogue on emerging risks in retail payment systems and enhance collaborative efforts to improve risk detection and mitigation. We encourage your active participation in Take on Payments and look forward to collaborating with you.

February 8, 2016


Will Biometrics Breed Virtual Clones?

In the middle of last November, our group, the Retail Payments Risk Forum, hosted a conference on the application of biometrics for banking applications. For me, one of the important "ah-ha" moments from the conference was hearing about the potential downside to the technology. While the various speakers and panelists certainly pointed out the powerful security improvements that could result from an increased use of biometrics, there were also thoughtful contributions about what could go wrong. To illustrate one of these downsides, let me take you back to the breach that occurred at the United States' Office of Personnel Management (OPM) earlier this year. For those who may have applied for a position with a government agency over the last 20 years or so, the form letter notifying you of the potential breach of your personal data read like this:

Since you applied for a position or submitted a background investigation form, the information in our records may include your name, Social Security number, address, date and place of birth, residency, educational and employment history, personal foreign travel history, information about immediate family as well as business and personal acquaintances, and other information used to conduct and adjudicate your background investigation.
Our records also indicate your fingerprints were likely compromised during the cyber intrusion. Federal experts believe the ability to misuse fingerprint data is currently (emphasis mine) limited.… If new means are identified to misuse fingerprint data, additional information and guidance will be made available.

The conference made clear, to me anyway, that fingerprint data certainly has the potential to be misused—now. Experience leads me to conclude that it is bound to happen, especially if the biometric measurements captured at enrollment are not converted to templates that mask the data.

Biometrics are sure to proliferate in the next few years. I think everyone ought to pause and consider whether or not the security advantages—that have the potential to be turned against us in a moment—are worth it. Consider a future breach and the subsequent form letter from some entity that has built biometrics into its payment process. It could include all of those things noted in the OPM excerpt above. Additionally, victims could also have to be told that their iris, facial, and voice prints along with their DNA were taken. A virtual clone masquerading as me makes me shudder. Imagine standing up when they ask for the real you to do so—and then the dismay at not being believed.

The work to advance biometric security needs not just to be focused on advancing the accuracy and efficacy of the usage, but also to have a heavy emphasis on protecting the data collected—while it's collected and used and when it's at rest, in storage. And no matter how good all of that work is, I hope that choices for transacting business remain. Cash, which requires no authentication, and paper checks, which authenticate with a signature, figure to provide useful alternatives for quite some time.

Photo of Julius Weyman By Julius Weyman, vice president, Retail Payments Risk Forum at the Atlanta Fed

February 8, 2016 in authentication, biometrics, data security, identity theft, innovation | Permalink

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January 4, 2016


The Year In Review

2015 marked the end of the era for my favorite late-night talk show host. In his 33 years of bringing laughter to late-night audiences, David Letterman is perhaps best known for his nightly Top 10 list. During the last several years, the Risk Forum's last blog for the year has included our own list of top 10 payments events. Our efforts clearly didn't match Letterman's entertaining Top 10s, and we have decided to retire our Top 10 blog in favor of a year-end review blog.

2015 can easily be characterized as "The Year of Deals." We witnessed two established payment processors, Worldpay and First Data, become publicly traded entities, with IPOs during the year. Following these IPOs, Square became the first "Unicorn"—a tech start-up with a valuation in excess of $1 billion—to test the public markets with its IPO. Beyond the IPOs, there were ample other noteworthy deals in 2015, including Ebay spinning off PayPal as its own entity; Visa acquiring its former subsidiary, Visa Europe; Global Payments' acquisition of Heartland; and a host of mergers such as the one between Early Warning and ClearXchange. On the venture capital and private equity side, indications suggest that 2015 will top 2014's nearly $10 billion investment in financial technology in the United States with payments-related investments leading the way.

Near and dear to the Risk Forum, notable risk-related stories will also make 2015 memorable. The long-anticipated initial EMV liability shift took place on October 1 with mixed reviews from different participants in the payments ecosystem. Data breaches that included the compromise of payment credentials and personally identifiable information seemed to be an almost-weekly event during the year. In response to the increasing incidence of data breaches and anticipated increase in card-not-present fraud, the buzz surrounding tokenization, which began in earnest with the launch of Apple Pay in 2014, intensified within the payments industry.

Mobile proximity payments might be the most frequent payment topic over the past five years, and 2015 was no different. While many have labeled each year over the last five as the "Year of Mobile Payments," mobile still has a way to go before the Risk Forum is willing to give this title to any year, including 2015. However, momentum for mobile proximity payments remained positive with the launch of Apple Pay rivals Samsung Pay and Android Pay. We witnessed a well-known and early established mobile wallet, SoftCard (originally branded as Isis), exit the playing field after being acquired by Google. The Merchant Customer Exchange (MCX), a consortium of retailers, launched a pilot of its mobile wallet—CurrentC—and has also partnered with Chase and its Chase Pay service with entrée to 94 million cards; and two large Financial Institutions, Chase and Capital One, both announced new mobile wallet initiatives. In December, Walmart and Target announced their own mobile payment applications. While mobile proximity payment usage remains minimal, it is becoming increasingly clear that consumers are using their mobile phones to shop online. According to holiday shopping figures from Black Friday through Cyber Monday 2015, mobile shopping accounted for approximately one-third of total e-commerce sales.

Finally, in 2015, the payment industry witnessed the launch of a comprehensive, collaborative effort to improve the speed and security of payments in the United States. In January, the Federal Reserve issued its long-anticipated Strategies for Improving the U.S. Payment System followed by the formation of two task forces, Faster Payments and Secure Payments, seeking to turn these strategies into actionable payment improvements. Related to improving the speed of payments, NACHA membership approved a same-day ACH service after a similar measure failed to gain approval in 2012.

As those in the payments industry have come to expect excitement and innovation, 2015 did not disappoint. And while it's certainly fun to look back, we must always keep looking ahead. Perhaps the most famous late-night talk show host, Johnny Carson, understood this best with his beloved great seer, soothsayer, and sage Carnac the Magnificent persona. Be on the lookout for our upcoming blog where the Risk Forum will channel our inner Carnac with some predictions and expectations for payments in 2016.

By the Retail Payments Risk Forum at the Atlanta Fed

January 4, 2016 in cybercrime, data security, mobile payments, payments study | Permalink

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October 5, 2015


Don't Let the Absence of a Fat Dog Scare You

Halloween, not at all my favorite holiday, looms. On this "hollow day" we commonly celebrate the ghastly—ghouls, ghosts, goblins and gloom—and with ever-increasing fanfare (when did lights get to be important for Halloween?). It's not clear to me what upside there is to focusing on that which encourages us to be frightened, worried, or just plain grossed out. This is especially true for those who work with or are responsible for retail payment systems. From cyberattacks and data breaches to basic fraud and theft, there is plenty to haunt and drive us to an early grave.

Today, I offer no solution to the threats; they seem to be ever with us. When bad things happen, and they almost surely will, one of our most important choices relates to reporting. To get to where I'm going I'll share a text series my son sent recently to report an incident at the house. His messages were as follows:

Absence of a fat dog

The trouble with security incidents is they don't come with a fat dog to vacuum up the mess. One of the trickier messes is in the reporting. What should be reported, to whom should it be reported, and when?

My first instinct is to say that when something goes awry, err to the side of reporting—early and often. I have said so in a previous post. Alas, it's not that easy; there is no fat dog to clean up the mess. Realizing that, I feel compelled to correct my earlier thinking or to at least offer a more nuanced view.

One can agree or not, like it or not, but the truth is notification obligations are not triggered by every security incident. What has to be reported and when varies by state as well as circumstance. That's grist for another blog. For this one, just note that one often has choices. What if bad consequences such as reduced sales or damaged reputations could have been avoided by not talking out of turn? It's not wrong to ponder that.

There are other arguments to be made against early reporting. For instance, early understanding may (likely will) need to be amended. The amendment could be dramatic if additional forensics make clear that initial conclusions or thoughts were incomplete or simply incorrect.

The other side is that erring in favor of the "early and often" principle or sacrificing self in the interest of others is "the right thing to do." I recently heard a person say their company chose to be public and transparent about a breach of theirs, in spite of incomplete information. The speaker said it was the right thing for them, in that instance. He also said it couldn't be a rule. His rule was that the CEO needs to be comfortable with what is decided because somebody is harmed no matter what the decision.

The resolution is an incident response plan. Be committed to developing a well-conceived one. Don't think your firm is too small for one. Knowing options like whether or not notice is required (and when) could prove priceless as could considering all the communication decisions in the absence of heat that accompanies a real incident. If incident response plans are already in place, test key decision makers with realistic exercises that include wide-ranging communication scenarios and find out what doesn't work for the company. Fix what is discovered before the storm hits.

Alternatively, I have a fat dog that doubles as a vacuum. Price is negotiable but any sale is final.

Photo of Julius Weyman By Julius Weyman, vice president, Retail Payments Risk Forum at the Atlanta Fed

October 5, 2015 in data security | Permalink

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July 13, 2015


Biometrics and Privacy, or Locking Down the Super-Secret Control Room

Consumer privacy has been a topic of concern for many years now, and Take on Payments has contributed its share to the discussions. Rewinding to a post from November 2013, you'll see the focus then was on how robust data collection could affect a consumer's privacy. While biometrics technology—such as fingerprint, voice, and facial recognition for authenticating consumers—is still in a nascent stage, its emergence has begun to take more and more of the spotlight in these consumer privacy conversations. We have all seen the movie and television crime shows that depict one person's fingerprints being planted at the crime scene or severed fingers or lifelike masks being used to fool an access-control system into granting an imposter access to the super-secret control room.

Setting aside the Hollywood dramatics, there certainly are valid privacy concerns about the capture and use of someone's biometric features. The banking industry has a responsibility to educate consumers about how the technology works and how it will be used in providing an enhanced security environment for their financial transaction activities. Understanding how their personal information will be protected will help consumers be likelier to accept it.

As I outlined in a recent working paper, "Improving Customer Authentication," a financial institution should provide the following information about the biometric technology they are looking to employ for their various applications:

  • Template versus image. A system collecting the biometric data elements and processing it through a complex mathematical algorithm creates a mathematical score called a template. The use of a template-based system provides greater privacy than a process that captures an image of the biometric feature and overlays it to the original image captured at enrollment. Image-based systems provide the potential that the biometric elements could be reproduced and used in an unauthorized manner.
  • Open versus closed. In a closed system, the biometric template will not be used for any other purpose than what is stated and will not be shared with any other party without the consumer's prior permission. An open system is one that allows the template to be shared among other groups (including law enforcement) and provides less privacy.
  • User versus institutional ownership. Currently, systems that give the user control and ownership of the biometric data are rare. Without user ownership, it is important to have a complete disclosure and agreement as to how the data can be used and whether the user can request that the template and other information be removed.
  • Retention. Will a user's biometric data be retained indefinitely, or will it be deleted after a certain amount of time or upon a certain event, such as when the user closes the account? Providing this information may soften a consumer's concerns about the data being kept by the financial institution long after the consumer sees no purpose for it.
  • Device versus central database storage. Storing biometric data securely on a device such as a mobile phone provides greater privacy than cloud-based storage system. Of course, the user should use strong security, including setting strong passwords and making sure the phone locks after a period of inactivity.

The more the consumer understands the whys and hows of biometrics authentication technology, I believe the greater their willingness to adopt such technology. Do you agree?

Photo of David Lott By David Lott, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

July 13, 2015 in biometrics, consumer protection, data security, privacy | Permalink

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June 15, 2015


“Customer, You Have the Conn”

Sometimes when you're watching nautical-themed movies, you'll hear the phrase, "I have the conn." The person who speaks this phrase is alerting all those on the vessel that he or she is in control with regard to the vessel's direction and speed. Customers could utter that phrase with regard to their payment vessels—they pretty much have full control in that they make the final choices about their method of payment. They may be restricted by the payment options a merchant offers, but in most cases, if they don't like the options they can shop, or secure services elsewhere.

One of the challenges with payment security that we frequently mention in our posts and speaking engagements is the disincentive that various consumer protection regulations give for consumers to adopt strong security practices. We have all seen or heard of the consumers who write their PINs on their debit cards or set up the PIN 1-2-3-4. In addition, research consistently tells us that consumers often select easily guessed user IDs and passwords—and then often use those same ID/password combinations on multiple sites.

Financial institutions and other payment stakeholders have long worked to develop tools that will encourage customers to be more aware of their financial account activity and contribute to minimizing fraud losses. Account alerts are among the most useful and popular of the tools. When consumers set up account alerts, they can usually specify conditions that will trigger a text message or e-mail. Common alerts are sent when the account balance drops below a set threshold, a debit transaction posts in excess of a specified amount, or an address or phone number change was made on the account. These alerts are beneficial, but they are merely reactive; they report only when a condition has already occurred.

I believe we will soon see a major breakthrough in card security. There are new applications now in testing or in early roll-out phases. These applications will allow customers to be proactive because they will be able to set up a number of filters or controls on their payment cards that will dictate whether a transaction even gets to the point for an authorization decision. For example, if I have a payment card that I use only for gasoline purchases, I can designate my settings to reject transactions coming from other merchant categories. Or I can specify that no international transactions should be allowed. At the extreme end of the control options, I can "turn off" my card, thereby blocking all transactions, and then I can turn it back on when I am ready to use it again. The possible options and filters are almost limitless for this self-service function. Yes, there will be the need for strong customer education, and the choices will require a reasonable limit or the customer will never remember what they set.

If these options are enabled and cardholders are then willing to "take the conn," this new tool could help significantly reduce the number of unauthorized transactions. Critical to the success is whether cardholders will set a reasonable range of parameters based on their normal card usage patterns so they don't get transactions rejected they actually make themselves but still be able to weed out the truly unauthorized transactions. I say "full speed ahead" with such tools. What do you say?

Photo of David Lott By David Lott, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

June 15, 2015 in consumer protection, data security, innovation | Permalink

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April 6, 2015


What Can Parenting Teach Us about Data Security?

My older child often asks if he can play at his friend's Mac's house. If his homework is completed, my wife and I will give him the green light, as we are comfortable with where he is heading. This level of comfort comes from our due diligence of getting to know Mac's parents and even the different sitters who watch the children when Mac's parents might be working late. Things often get more challenging when he calls to tell us that he and Mac want to go to another friend's house. And this might not be the last request as our son might end up at yet another friend's house before finding his way home for dinner. We might not be familiar with these other environments beyond Mac's house so we often have to rely on other parents' or sitters' judgment and due diligence when deciding whether or not it is okay for our son to go. Regardless of under whose supervision he falls, we, as his parents, are ultimately responsible for his well-being and want to know where he is and who he is with.

As I think about my responsibility in protecting my children in their many different environments, I realize that parenting is an excellent metaphor for vendor risk management and data security. For financial institutions (FI), it is highly likely that they are intimately familiar with their core banking service providers. For merchants, the same can probably be said for their merchant acquiring relationship.

However, what about the relationships these direct vendors have with other third parties that could access your customers' valuable data? While it probably isn't feasible for FIs and merchants to be intimately familiar with the potentially hundreds of parties that have access to their information, they should be familiar with the policies and procedures and due diligence processes of their direct vendors as it relates to their vendor management programs.

In today's ever-connected world, with literally thousands of third-party solution providers, it is necessary for FIs and merchants to be familiar with who all has access to their customers' data and with the different places this data resides. Knowing this information, it is then important to assess whether or not you are comfortable with the entity you are entrusting with your customers' data. Just as I am responsible for ensuring my children's safety no matter where or who they are with, financial institutions and merchants are ultimately responsible for protecting their customers' data. This difficult endeavor should not be taken lightly. Beyond the financial risks of fraud losses associated with stolen or lost data, businesses might also be subject to compliance-related fines. And you are highly likely to take a negative hit to your reputation. What are you doing to ensure various third-parties are protecting your sensitive data?

Photo of Douglas King By Douglas A. King, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed


April 6, 2015 in consumer protection, data security, KYC, risk management, third-party service provider | Permalink

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January 5, 2015


Can Insecurity Keep Us from Faster Payments?

Helen Keller once said, “Security is mostly a superstition. It does not exist in nature.… Avoiding danger is no safer in the long run than outright exposure.” It is unlikely that Ms. Keller was considering real-time payments when she offered this perspective, but this post will.

As part of its broad effort to chart a future for payments, the Federal Reserve conducted a Payment Security Landscape Study. It was no surprise that the study highlights “persistent and ever-changing threats” as a given within payment systems. The study suggested several improvement or focus areas:

  • Improve industry coordination to increase the timely adoption and implementation of technology, standards and protocols.
  • Improve the protection of sensitive data that can be used to perpetrate fraud, including devaluing or eliminating such data from the payments process.
  • Strengthen authorization and authentication of parties and devices across all payment methods and channels and adapt approaches as the payment system evolves.
  • Improve the collection and reporting of aggregate data on fraud losses and avoidance.
  • Broaden access to actionable security and fraud threat information to payments system participants, including less technologically sophisticated participants and end users.

Applying Ms. Keller’s risk perspective to payments systems would suggest that work to prevent security breaches, fraud, or theft is futile. Fortunately, using the foregoing list as evidence, it’s clear that those considering the future of payments haven’t adopted this perspective. The most critical elements for optimizing the security of payments are all there, though some could surmise that detection or prevention measures have a disproportionate emphasis, with response measures perhaps rating as secondary. It is important to make sure that risk management is optimized across all three broad areas—prevention and detection, yes, but also response. In particular, in the context of response, the enforcement landscape will need to be ordered such that consequences for perpetrators are both timely and proportionate to the harm a given incident may cause. User protections will need to evolve as well.

If one agrees that advancing faster payments offers rewards and that holding back doesn’t promise freedom from harm, it’s encouraging to observe industry direction. Indeed, it seems reasonable to conclude that faster payments scheme architects will heed the notion that real-time payments will require real-time security. Particularly encouraging is that the discussion on payment security is at the center of industry dialogue and likely to remain so as the work to advance faster payments continues.

By Julius Weyman, vice president, Retail Payments Risk Forum at the Atlanta Fed

January 5, 2015 in consumer protection, data security, emerging payments | Permalink

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December 22, 2014


Top 10 Payments Events in 2014

As the year draws to a close, the Portals and Rails team would like to share its own "Top 10" list of major payments-related events and issues that took place in the United States this year.

#10: Proposed prepaid rule. After a long wait, the Consumer Financial Protection Bureau issued its proposed rules on general reloadable prepaid cards in November. While the major players in the prepaid card industry had already adopted most of the practices included in the proposed rule, the proposal allowing overdrafts and credit extensions is likely to generate differing perspectives during the comment period before a final rule is adopted in 2015.

#9: Regulation II. The U.S. Circuit Court of Appeals for the District of Columbia upheld the Federal Reserve Bank's rules regarding interchange fees and network routing rules, reversing a 2013 decision. Notice of appeal on the interchange fee portion of the ruling has been given, but resolution of the network routing rules has cleared the way for the development of applications supporting routing on chip cards.

#8: Payment trends. The detailed Federal Reserve Bank's triennial payments study results were released in July 2014, continuing the Fed's 15-year history of conducting this comprehensive payments research. Cash usage continued to decline but remained the most-used form of payment in terms of transaction volume.

#7: Card-not-present (CNP) fraud. With the growing issuance of chip cards and the experience of other countries post-EMV migration—with substantial amounts of fraud moving to the online commerce environment—the payments industry continues to search for improved security solutions for CNP fraud that minimize customer friction and abandonment.

#6: Faster payments. Continuing a process it began in the fall of 2013 at the release of a consultative white paper, the Federal Reserve Bank held town halls and stakeholder meetings throughout the year in preparation of the release of its proposed roadmap towards improving the payment system.

#5: Virtual currencies. Every conference we attended had sessions or tracks focused on virtual currencies like Bitcoin. While there was some advancement in the acceptance of Bitcoin by major retailers, the number of consumers using the currency did not rise significantly.

#4: Mobile payments. The entry of Apple with its powerful brand identity into the mobile payments arena with Apple Pay has energized the mobile payments industry and brought improved payment security through tokenization and biometrics closer to the mainstream. (Apple Pay's impact on mobile payment transaction volume will likely be negligible for a couple of years.) Additionally, the use of host card emulation, or HCE, as an alternative contactless communications technology provides another option for mobile wallet development.

#3: EMV migration. The frequency and magnitude of the data breaches this year have spurred financial institutions and merchants alike into speeding up their support of EMV chip cards in advance of the October 2015 liability shift.

#2: Third-party processors. Regulators and law enforcement escalated the attention they were giving to the relationships of financial institutions with third-party processors because of increased concerns about deceitful business practices as well as money laundering.

And…drum roll, please!

#1: Data breaches. The waves of data breaches that started in late 2013 continued to grow throughout 2014 as more and more retailers revealed that their transaction and customer data had been compromised. The size and frequency of the data breaches provided renewed impetus to improve the security of our payments system through chip card migration and the implementation of tokenization.

How does this list compare to your Top 10?

All of us at the Retail Payments Risk Forum wish our Portals and Rails readers Happy Holidays and a prosperous and fraud-free 2015!

Photo of Mary Kepler Photo of Doug King Photo of David Lott Photo of Julius Weyman



Mary Kepler, vice president; Doug King, payments risk specialist; Dave Lott, payments risk expert; and Julius Weyman, vice president—all of the Atlanta Fed's Retail Payments Risk Forum.


December 22, 2014 in chip-and-pin, cybercrime, data security, EMV, innovation, mobile payments, prepaid, regulations, third-party service provider | Permalink

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October 20, 2014


Let's Talk Tokens, Part III: What Problem Does Tokenization Solve?

Portals and Rails recently embarked on a series of posts on tokenization. In the first installment, we defined tokenization and distinguished between a merchant-centric enterprise tokenization solution and payment tokens generated as an issuer-centric end-to-end solution. In the second installment, we examined several different attributes of the issuer-centric end-to-end token initiatives currently under way and considered their impact on mitigating risk. In this post, we examine the shortcomings of end-to-end token initiatives and question if they are really a coup in mitigating risks in today's environment.

The goal of payment tokenization is to substitute sensitive data—such as account numbers, expiration dates, and security codes—that criminals can use to extract monetary value with surrogate values that lack monetary value. In light of the number and depth of recent data breaches, tokenization seems like a grand idea—let's get data that fraudsters can use out of the payment transaction flow and the merchants' systems.

But current uses for these end-to-end initiatives are limited to card-on-file transactions for in-app or e-commerce payments and mobile proximity payments. I know you have to start somewhere but, in the near future, only a small percentage of transactions will use tokenization. These end-to-end initiatives are solid solutions, but are currently extremely limited. Thus, there will be a continued need for the industry to use a variety of methods to fight fraud, including the merchant-centric enterprise tokenization solutions the first installment discussed.

And isn't the point of the significant EMV investment currently under way to mitigate risks associated with counterfeit cards using compromised card data? In other words, it should render compromised card data useless. But I am hearing the EMV naysayers claiming that, in an EMV world, data compromises will still take place and, while fraudsters may not be able to counterfeit cards, they can still use that data to shop on the Internet.

Those naysayers are correct.

But let's circle back to the use cases for the current issuer-centric end-to-end token initiatives. Is tokenizing payment data for card-on-file and mobile proximity payments really going to have a material impact on preventing card-not-present fraud? Are these tokenization efforts really the best solution for this challenge? It could be many years before we regularly use our mobile phones for proximity payments. I am confident that we will be using chip-enabled cards for a significant number of transactions within two to three years. Would it be wiser to rely on solutions that leverage the chip or other security features of cards? Or maybe it's time we realize that cards weren't designed for card-not-present uses and place a higher priority on the broader adoption of existing and emerging non-card-based payment solutions in a multi-layered security approach.

Unfortunately, I do not have the answers. But these questions and topics will certainly be discussed during the upcoming Securing Remote Payments conference that the Retail Payments Risk Forum and the Secure Remote Payment Council is hosting. If you are interested in attending, please reach out to us. We will be in touch with more details.

In the next installment in this series, we'll look at new security and operational risks introduced with these token initiatives.

By Douglas A. King, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed


October 20, 2014 in cards, data security, EMV | Permalink

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August 18, 2014


Crooks Target Business Clients

Fraudsters are always looking for ways to take advantage of trusted relationships, such as between a business and their established vendors. The fraudster's goal is to trick the business into thinking they are paying their vendor when the dollars are actually being diverted to the crook. A common scheme is for a business to receive instructions on a spoofed but legitimate-seeming e-mailed invoice to send a wire transfer to the vendor or business partner immediately. The business may pay, not realizing until it's too late that the funds are actually going to a fraudster or money mule. The Internet Crime Complaint Center (IC3) recently issued a scam alert on this scheme noting reported losses averaging $55,000, with some losses exceeding $800,000.

Criminals can perpetrate this type of fraud in many ways. Devon Marsh, an operational risk manager at Wells Fargo and chairman of the Risk Management Advisory Group for NACHA–the Electronic Payments Association, addressed some of the ways at a Payments 2014 conference session "Supply Chain Fraud Necessitates Authentication for Everyone," including these:

  • Calling or e-mailing the business, pretending to be the vendor, to change payment instructions
  • Sending counterfeit invoices that appear genuine because they are patterned after actual invoices obtained through a breach of the business's e-mail system or a vendor's accounts receivable system

Marsh also discussed important ways to reduce the risk of falling victim to these schemes. As with any e-mail that seems questionable, the business should verify the legitimacy of the vendor's request by reaching out to the vendor with a phone call—and not using the number on the questionable e-mail or invoice. The business should also educate its accounts payable department to review any vendor's payment requests carefully, verifying that the goods or services were received or performed and questioning and checking on anything at all that does not look right, such as an incorrect or different vendor name or e-mail address.

The Federal Financial Institutions Examination Council's 2011 supplement to its guidance stresses the need in an internet environment for financial institutions to authenticate their customers. The concepts this guidance addresses are also sound practices for businesses to use in authenticating their vendors.

Photo of Deborah ShawBy Deborah Shaw, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

August 18, 2014 in authentication, cybercrime, data security, identity theft | Permalink

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