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.
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March 11, 2013
The ATM: Disappearing Soon from a Location near You?
The ATM industry in the United States is facing a set of regulatory and operating rule deadlines that might impact the industry as much as similar deadlines did during 2005–08. Back then, ATM owners were required to upgrade their terminals to support the more secure Triple Data Encryption Standard (3DES) to safeguard ATM transaction messages during transmission. To comply, ATM owners faced the expense of hardware and software upgrades. Because a number of ATM independent sales organizations (ISOs) were operating older machines that required replacement rather than upgrades, they sold off their businesses claiming they could not support these additional expenses. Although the total number of ATMs is difficult to determine, most people in the industry agree that the 3DES requirement resulted in fewer of them.
Now it's "déjà vu all over again" for many ATM owners. Two recent changes to regulatory and operating rules require additional investment in their ATM fleets. The first of these is the accessibility provisions of the 2010 American with Disabilities Act (ADA) that include, but are not limited to, a voice guidance requirement, Braille signage, and input controls for visually-impaired individuals. These provisions were published in September 2010. ATM owners had a compliance date of March 2011 and an enforcement date of March 2012. An online Wall Street Journal article written near the 2012 deadline estimated that half of the ATMs in the United States did not fully comply with the new requirements. Because many ATM owners were in near compliance at the time of the deadline, the current level of incomplete compliance is not known. I understand, however, that several ATM owners, particularly ISOs with low-volume cash dispensers, have still not upgraded their ATMs. Despite a number of lawsuits filed by visually-impaired individuals against noncompliant ATM owners, many appear to be continuing to operate while hoping to go undetected. The act allows an exemption to an ATM owner if the upgrade would be an "undue burden," but the burden is on the owner to seek the exemption and prove the burden.
The second change comes from the recently announced liability-shift roadmaps for EMV chip implementation by Visa and MasterCard. MasterCard set a deadline of October 2016; Visa, a year later. Currently, the card issuer bears losses from fraudulent card transactions at the ATM. After those dates, if a counterfeit card is used at an ATM that has not been upgraded to handle EMV cards—in which case the ATM has to read the card's magnetic stripe back-up—the ATM owner will bear the loss resulting from that fraudulent transaction.
Even more pressing is MasterCard's liability shift for non-U.S.-issued Maestro card transactions at U.S. ATMs, scheduled for April 19, 2013. The National ATM Council, an industry group for ATM ISOs, has formally requested MasterCard to both delay this shift and push back the overall liability shift deadline to synchronize with Visa's 2017 date. Already struggling with the increased costs resulting from the upgrade decision, ISO ATM owners fear that absorbing counterfeit card losses would devastate their financial condition. I suspect that as many of them have done with the ADA requirements, many may continue to postpone upgrade expenses and just hope that their machines are not targeted. However, as I noted in a recent post, criminals tend to attack the weakest elements of their target.
ATM usage continues to face competition from debit POS (purchases and cash-back) as well as the expanding mobile payments channel. With ATMs being such a high fixed-cost operation, the impact of additional upgrade expense at a time when usage is decreasing is likely to take a toll on the number of operating ATMs. What do you think?
By David Lott, a retail payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed
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April 23, 2012
Consumer protection: What to do when the consumer’s the threat?
How much for a cockroach in my take-out? What should the burger joint give me for gaining weight from eating their cheeseburgers? Consumers seeking a quick payday through frivolous lawsuits are old news in the food industry. What you may not know is that financial institutions must battle the same problem, as malicious actors twist consumer protection legislation for their own profit.
An American Banker article described how a federal court in Pennsylvania dismissed a lawsuit brought against a credit union claiming that one of their ATMs lacked a mandatory Electronic Funds Transfer Act (EFTA) sticker disclosing fees. This was just one in a string of lawsuits filed by the same plaintiffs. Some financial institutions have decided to settle instead of taking their chances in court. Some of the plaintiffs mentioned in the American Banker article have apparently decided to make a living by scoping out ATMs where stickers have fallen off or been removed, making transactions at these machines, and then filing suit against the unsuspecting operator.
This consumer behavior represents a type of second-order compliance risk. In addition to the formal consequences of noncompliance with regulation, financial institutions (FI) must also consider that some bad actors may attempt to undermine their compliance efforts. As a practical matter, FIs can manage this risk by validating EFTA compliance each time the ATM is serviced. As the machine is being refilled with cash and receipt paper, servicers should check for the disclosure sticker and have extras on hand in case it has been removed. The FI should maintain records of verification and/or replacement.
These lawsuits also raise larger questions. The other week I blogged about how the Federal Reserve has at times attempted to correct market failures in the payments industry. However, the unintended consequences of legislation discussed in this post demonstrate that government failure is also a risk. Government failure is any time that a government intervention to overcome a market failure results in a less efficient outcome than if no action had been taken. The case of these ATM vigilantes shows that legislation meant to protect the consumer can sometimes be used to justify wasteful lawsuits. In addition to determining if there is a legitimate market failure to correct, policymakers also need to consider the potential for government failure and unintended consequences of regulation before passage.
By Jennifer C. Windh, a senior payments risk analyst in the Retail Payments Risk Forum at the Atlanta Fed
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September 27, 2010
Could the fight against ATM fraud use the help of biometrics?
Biometrics is defined as "the measurement and analysis of unique physical or behavioral characteristics especially as a means of verifying personal identity." There are several different identifiers that may be used in biometrics, including fingerprint and hand geometry, voice and vein recognition, as well as retina, iris, and facial scans. The concept of biometric technology as a customer authentication tool to protect the identity and accounts of individuals from fraud or theft is promising. However, relinquishing something as personal as a unique trait may leave some skeptical and others simply unnerved.
But can privacy concerns or consumer apprehension over the use of biometrics overcome the need to address the growing instances of ATM fraud?
Physical attacks on ATMs increase
According to Javelin Strategy & Research, in 2009, 10 percent of fraud victims in the United States experienced fraudulent ATM cash withdrawals. These schemes typically involve the use of a skimming device that may sit above the actual card reader and capture PIN entries. Other methods are more brazen and involve the physical act of pulling an ATM from the wall or floor and disassembling it elsewhere. Additional types of ATM attacks may involve data breaches, social engineering, and software vulnerabilities.
Successful adoption of biometric technology
Although the thought of biometric technology may conjure up images of George Orwell's 1984, for years now, several major Japanese banks have been using some form of biometric technology to combat ATM fraud. One example is the Bank of Tokyo-Mitsubishi, which uses palm vein-pattern biometrics for account and identity authentication. After inserting the card and entering a PIN, the user holds his or her hand over a sensor on the ATM for verification purposes. Because palm vein patterns are unique to each individual, others are not able to withdraw money using stolen cards. The palm vein information is stored in the card itself, which also keeps the biometric information hidden from bank employees.
In 2006, a new Japanese law made banks liable for fraudulent ATM withdrawals. Prior to the law's passage, banks did not impose withdrawal limits and did not protect against losses due to theft. As a result of the new law, today more than 90 percent of Japan's banks use some form of vein-pattern recognition.
A lack of standardization and the costs of implementation ring in at the top of the list when we consider why the financial services industry is apprehensive about integrating this technology. Also topping the list are privacy concerns and general consumer apprehension. But surprisingly, consumers have offered positive feedback when asked about the use of biometrics to combat fraud. In fact, when asked what they would choose, more consumers preferred using biometrics as an additional authentication tool over a one-time password device.
Will banks be willing to invest the time and money into technology that may or may not become an industry standard? Or are some banks waiting for other banks to serve as pioneers in the United States before they invest in biometric ATM machines?
Creating a chain of trust
U.S. consumers have historically shown reluctance to embrace new technologies until their reliability and trustworthiness have been vetted in the marketplace for a number of years. Part of building this trust will require building a track record of robustness with respect to both security and reliability. While concerns about biometrics may abound, these concerns can be addressed by educating the user and industry.
The concept of biometrics shows great potential for combating ATM fraud, but is it the panacea? Or is the key simply using technology more advanced than that employed by the bad guys, staying one step ahead of them rather than one step behind?
By Ana Cavazos-Wright, senior payments risk analyst in the Retail Payments Risk Forum at the Atlanta Fed
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