The Australian Payments Clearing Association (APCA) releases card fraud statistics every six months for the preceding 12m period. Lockstep monitors these figures and plots the trend data. We got a bit too busy in 2014 and missed the last couple of APCA releases, so this blog is a catch up, summarising and analysing stats from calendar year 2013 and AU financial year 2014 (July 2013 to June 2014).
In the 12 months to June 2014,
- Total card fraud rose by 22% to A$321 million
- Card Not Present (CNP) fraud rose 27% to A$256 million
- CNP fraud now represents 80% of all card fraud.
APCA is one of the major payments systems regulators in Australia. It has only ever had two consistent things to say about Card Not Present fraud. First, it reassures the public that CNP fraud is only rising because online shopping is rising, implying that it's really not a big deal. Second, APCA produces advice for shoppers and merchants to help them stay safe online.
I suppose that in the 1950s and 60s, when the road toll started rising dranatically and car makers we called on to improve safety, the auto industry might have played down that situation like APCA does with CNP fraud. "Of course the road toll is high" they might have said; "it's because so many people love driving!". Fraud is not a necessary part of online shopping; at some point payments regulators will have to tell us, as a matter of policy, what level of fraud they think is actually reasonable, and start to press the industry to take action. In absolute terms, CNP fraud has ballooned by a factor of 10 in the past eight years. The way it's going, annual online fraud might overtake the cost of car theft (currently $680 million) before 2020.
As for APCA's advice for shoppers to stay safe online, most of it is nearly useless. In their Christmas 2014 media release (PDF), APCA suggested:
Consumers can take simple steps to help stay safe when shopping online including:
- Only providing their card details on secure websites – looking for the locked padlock.
- Always keeping their PC security software up-to-date and doing a full scan often.
The truth is very few payment card details are stolen from websites or people's computers. Organised crime targets the databases of payment processors and big merchants, where they steal the details of tens of millions of cardholders at once. Four of the biggest ever known credit card breaches occurred in the last 18 months (Ref: DataLossDB):
- 109,000,000 credit cards - Home Depot, September 2014
- 110,000,000 credit cards - Target, December 2013
- 145,000,000 credit cards - eBay, May 2014
- 152,000,000 credit cards - Adobe, Oct 2013.
In its latest Data Breach Investigations Report, Verizon states that "2013 may be remembered as ... a year of transition to large-scale attacks on payment card systems".
Verizon has plotted the trends in data breaches at different sources; it's very clear that servers (where the datsa is held) have always been the main target of cybercriminals, and are getting proportionally more attention year on year. Diagrag at right from Verizon Data Breach Investigations Report 2014.
So APCA's advice to look for website padlocks and keep anti-virus up-to-date - as important as that may be - won't do much at all to curb payment card theft or fraud. You might never have shopped online in your life, and still have your card details stolen, behind your back, at a department store breach.
Over the course of a dozen or more card fraud reports, APCA has had an on-again-off-again opinion of the credit card scheme's flagship CNP security measure, 3D Secure. In FY2011 (after CNP fraud went up 46%), APCA said "retailers should be looking at a 3D Secure solution for their online checkout". Then in their FY2012 media release, as losses kept increasing, they made no mention of 3D Secure at all.
Calendar year 2012 saw Australian CNP fraud fall for the first time ever, and APCA was back on the 3D Secure bandwagon, reporting that "The drop in CNP fraud can largely be attributed to an increase in the use of authentication tools such as MasterCard SecureCode and Verified by Visa, as well as dedicated fraud prevention tools."
Sadly, it seems 2012 was a blip. Online fraud for FY2014 (PDF) has returned to the long term trend. It's impossible to say what impact 3D Secure has really had in Australia, but penetration and consumer awareness of this technology remains low. It was surprising that APCA previously rushed to attribute a short-term drop in fraud to 3D Secure; that now seems overly optimistic, with CNP frauds continuing to mount after all.
In my view, it beggars belief the payments industry has yet to treat CNP fraud as seriously as it did skimming and carding. Technologically, CNP fraud is not a hard problem. It's just the digital equivalent of analogue skimming and carding, and it could be stopped just as effectively by using chips to protect cardholder data, just as they do in Card Present payments, whether by EMV card or NFC mobile devices.
In 2012, I published a short paper on this: Calling for a Uniform Approach to Card Fraud Offline and On (PDF).
The credit card payments system is a paragon of standardisation. No other industry has such a strong history of driving and adopting uniform technologies, infrastructure and business processes. No matter where you keep a bank account, you can use a globally branded credit card to go shopping in almost every corner of the world. The universal Four Party settlement model, and a long-standing card standard that works the same with ATMs and merchant terminals everywhere underpin seamless convenience. So with this determination to facilitate trustworthy and supremely convenient spending in every corner of the earth, it’s astonishing that the industry is still yet to standardise Internet payments. We settled on the EMV standard for in-store transactions, but online we use a wide range of confusing and largely ineffective security measures. As a result, Card Not Present (CNP) fraud is growing unchecked.
This article argues that all card payments should be properly secured using standardised hardware. In particular, CNP transactions should use the very same EMV chip and cryptography as do card present payments.
This is an updated version of arguments made in Lockstep's submission to the 2009 Cyber Crime Inquiry by the Australian federal government.
In stark contrast to other fields, cyber safety policy is almost exclusively preoccupied with user education. It's really an obsession. Governments and industry groups churn out volumes of well-meaning and technically reasonable security advice, but for the average user, this material is overwhelming. There is a subtle implication that security is for experts, and that the Internet isn't safe unless you go to extremes. Moreover, even if consumers do their very best online, their personal details can still be taken over in massive criminal raids on databases that hardly anyone even know exist.
Too much onus is put on regular users protecting themselves online, and this blinds us to potential answers to cybercrime. In other walks of life, we accept a balanced approach to safety, and governments are less reluctant to impose standards than they are on the Internet. Road safety for instance rests evenly on enforceable road rules, car technology innovation, certified automotive products, mandatory quality standards, traffic management systems, and driver training and licensing. Education alone would be nearly worthless.
Around cybercrime we have a bizarre allergy to technology. We often hear that 'Preventing data breaches not a technology issue' which may be politically correct but it's faintly ridiculous. Nobody would ever say that preventing car crashes is 'not a technology issue'.
Credit card fraud and ID theft in general are in dire need of concerted technological responses. Consider that our Card Not Present (CNP) payments processing arrangements were developed many years ago for mail orders and telephone orders. It was perfectly natural to co-opt the same processes when the Internet arose, since it seemed simply to be just another communications medium. But the Internet turned out to be more than an extra channel: it connects everyone to everything, around the clock.
The Internet has given criminals x-ray vision into peoples' banking details, and perfect digital disguises with which to defraud online merchants. There are opportunities for crime now that are both quantitatively and qualitatively radically different from what went before. In particular, because identity data is available by the terabyte and digital systems cannot tell copies from originals, identity takeover is child's play.
You don't even need to have ever shopped online to run foul of CNP fraud. Most stolen credit card numbers are obtained en masse by criminals breaking into obscure backend databases. These attacks go on behind the scenes, out of sight of even the most careful online customers.
So the standard cyber security advice misses the point. Consumers are told earnestly to look out for the "HTTPS" padlock that purportedly marks a site as secure, to have a firewall, to keep their PCs "patched" and their anti-virus up to date, to only shop online at reputable merchants, and to avoid suspicious looking sites (as if cyber criminals aren't sufficiently organised to replicate legitimate sites in their entirety). But none of this advice touches on the problem of coordinated massive heists of identity data.
Merchants are on the hook for unwieldy and increasingly futile security overheads. When a business wishes to accept credit card payments, it's straightforward in the real world to install a piece of bank-approved terminal equipment. But to process credit cards online, shopkeepers have to sign up to onerous PCI-DSS requirements that in effect require even small business owners to become IT security specialists. But to what end? No audit regime will ever stop organised crime. To stem identity theft, we need to make stolen IDs less valuable.
All this points to urgent public policy matters for governments and banks. It is not enough to put the onus on individuals to guard against ad hoc attacks on their credit cards. Systemic changes and technological innovation are needed to render stolen personal data useless to thieves. It's not that the whole payments processing system is broken; rather, it is vulnerable at just one point where stolen digital identities can be abused.
Digital identities are the keys to our personal kingdoms. As such they really need to be treated as seriously as car keys, which have become very high tech indeed. Modern car keys cannot be duplicated at a suburban locksmith. It's possible you've come across office and filing cabinet keys that carry government security certifications. And we never use the same keys for our homes and offices; we wouldn't even consider it (which points to the basic weirdness in Single Sign On and identity federation).
In stark contrast to car keys, almost no attention is paid to the pedigree of digital identities. Technology neutrality has bred a bewildering array of ad hoc authentication methods, including SMS messages, one time password generators, password calculators, grid cards and picture passwords; at the same time we've done nothing at all to inhibit the re-use of stolen IDs.
It's high time government and industry got working together on a uniform and universal set of smart identity tools to properly protect consumers online.
Stay tuned for more of my thoughts on identity safety, inspired by recent news that health identifiers may be back on the table in the gigantic U.S. e-health system. The security and privacy issues are large but the cyber safety technology is at hand!
The problem of identity takeover
The root cause of much identity theft and fraud today is the sad fact that customer reference numbers, personal identifiers and attributes generally are so easy to copy and replay without permission and without detection. Simple numerical attributes like bank account numbers and health IDs can be stolen from many different sources, and replayed with impunity in bogus transactions.
Our personal data nowadays is leaking more or less constantly, through breached databases, websites, online forms, call centres and so on, to such an extent that customer reference numbers on their own are no longer reliable. Privacy consequentially suffers because customers are required to assert their identity through circumstantial evidence, like name and address, birth date, mother’s maiden name and other pseudo secrets. All this data in turn is liable to be stolen and used against us, leading to spiraling identity fraud.
To restore the reliability of personal attribute data, we need to know their pedigree. We need to know that a presented data item is genuine, that it originated from a trusted authority, it’s been stored safely by its owner, and it’s been presented with the owner’s consent. If confidence in single attributes can be restored then we can step back from all the auxiliary proof-of-identity needed for routine transactions, and thus curb identity theft.
A practical response to ID theft
Several recent breaches of government registers leave citizens vulnerable to ID theft. In Korea, the national identity card system was attacked and it seems that all Korean's citizen IDs will have to be re-issued. In the US, Social Security Numbers are often stolen and used tin fraudulent identifications; recently, SSNs of 800,000 Post Office employees appear to have been stolen along with other personal records.
Update 14 June 2015: Now last week we got news of a hugely worse breach of US SSNs (not to mention deep personal records) of four million federal US government employees, when the Office of Personnel Management was hacked.
We could protect people against having their stolen identifiers used behind their backs. It shouldn't actually be necessary to re-issue every Korean's ID, not to worry that US SSNs aren't usually replaceable. And great improvements may be made to the reliability of identification data presented online without dramatically changing Relying Parties' back-end processes. If for instance a service provider has always used SSN as part of its identification regime, they could continue to do so, if only the actual Social Security Numbers being received were reliable!
The trick is to be able to tell "original" ID numbers from "copies". But what does "original" even mean in the digital world? A more precise term for what we really want is pedigree. What we need is to be able to present attribute data in such a way that the receiver may be sure of their pedigree; that is, know that the attributes were originally issued by an authoritative body, that the data has been kept safe, and that each presentation of the attribute has occurred under the owner's control.
These objectives can be met with the help of smart cryptographic technologies which today are built into most smart phones and smartcards, and which are finally being properly exploited by initiatives like the FIDO Alliance.
"Notarising" attributes in chip devices
There are ways of issuing attributes to a smart chip device that prevent them from being stolen, copied and claimed by anyone else. One way to do so is to encapsulate and notarise attributes in a unique digital certificate issued to a chip. Today, a great many personal devices routinely embody cryptographically suitable chips for this purpose, including smart phones, SIM cards, "Secure Elements", smartcards and many wearable computers.
Consider an individual named Smith to whom Organisation A has issued a unique attribute N (which could be as simple as a customer reference number). If N is saved in ordinary computer memory or something like a magnetic stripe card, then it has no pedigree. Once the number N is presented by the cardholder in a transaction, it has the same properties as any other number. To better safeguard N in a chip device, it can be sealed into a digital certificate, as follows:
1. generate a fresh private-public key pair inside Smith’s chip
2. export the public key
3. create a digital certificate around the public key, with an attribute corresponding to N
4. have the certificate signed by (or on behalf of) organisation A.
The result of coordinating these processes and technologies is a logical triangle that inextricably binds cardholder Smith to their attribute N and to a specific personally controlled device. The certificate signed by organisation A attests to both Smith’s entitlement to N and Smith's control of a particular key unique to the device. Keys generated inside the chip are retained internally, never divulged to outsiders. It is not possible to copy the private key to another device, so the logical triangle cannot be reproduced or counterfeited.
Note that this technique lies at the core of the EMV "Chip-and-PIN" system where the smart payment card digitally signs cardholder and transaction data, rendering it immune to replay, before sending it to the merchant terminal. See also my 2012 paper Calling for a uniform approach to card fraud, offline and on. Now we should generalise notarised personal data and digitally signed transactions beyond Card-Present payments into as much online business as possible.
Restoring privacy and consumer control
When Smith wants to present their attribute N in an electronic transaction, instead of simply copying N out of memory (at which point it would lose its pedigree), Smith’s transaction software digitally signs the transaction using the certificate containing N. With standard security software, any third party can then verify that the transaction originated from a genuine chip holding the unique key certified by A as containing the attribute N.
Note that N doesn't have to be a customer number or numeric identifier; it could be any personal data, such as a biometric template, or a package of medical information like an allergy alert, or an interesting isolated (and anonymous) property of the user such as their age.
The capability to manage multiple key pairs and certificates, and to sign transactions with a nominated private key, is increasingly built into smart devices today. By narrowing down what you need to know about someone to a precise attribute or personal data item, we will reduce identity theft and fraud while radically improving privacy. This sort of privacy enhancing technology is the key to a safe Internet of Things, and fortunately now is widely available.
Addressing ID theft
Perhaps the best thing governments could do immediately is to adopt smartcards and equivalent smart phone apps for holding and presenting such attributes as official ID numbers. The US government has actually come close to such a plan many times; Chip-based Social Security Cards and Medicare Cards have been proposed before, without realising their full potential. These devices would best be used as above to hold a citizen's identifiers and present them cryptographically, without vulnerability to ID theft and takeover. We wouldn't have to re-issue compromised SSNs; we would instead switch from manual presentation of these numbers to automatic online presentation, with a chip card or smart phone app conveying the data through digitally signatures.
This blog is an edited extract from an article of the same name, first published in the Journal of Internet Banking and Commerce, December 2012, vol. 17, no.3.
The credit card payments system is a paragon of standardisation. No other industry has such a strong history of driving and adopting uniform technologies, infrastructure and business processes. No matter where you keep a bank account, you can use a globally branded credit card to go shopping in almost every corner of the world. Seamless convenience is underpinned by the universal Four Party settlement model, and a long-standing card standard that works the same with ATMs and merchant terminals everywhere.
So with this determination to facilitate trustworthy and supremely convenient spending everywhere, it’s astonishing that the industry is still yet to standardise Internet payments. Most of the world has settled on the EMV standard for in-store transactions, but online we use a wide range of confusing and largely ineffective security measures. As a result, Card Not Present (CNP) fraud is growing unchecked. This article argues that all card payments should be properly secured using standardised hardware. In particular, CNP transactions should use the very same EMV chip and cryptography as do card present payments.
Skimming and Carding
With “carding”, criminals replicate stolen customer data on blank cards and use those card copies in regular merchant terminals. “Skimming” is one way of stealing card data, by running a card through a copying device when the customer isn’t looking (but it’s actually more common for card data to be stolen in bulk from compromised merchant and processor databases).
A magnetic stripe card stores the customer’s details as a string of ones and zeroes, and presents them to a POS terminal or ATM in the clear. It’s child’s play for criminals to scan the bits and copy them to a blank card.
The industry responded to skimming and carding with EMV (aka Chip-and-PIN). EMV replaces the magnetic storage with an integrated circuit, but more importantly, it secures the data transmitted from card to terminal. EMV works by first digitally signing those ones and zeros in the chip, and then verifying the signature at the terminal. The signing uses a Private Key unique to the cardholder and held safely inside the chip where it cannot be tampered with by fraudsters. It is not feasible to replicate the digital signature without having access to the inner workings of the chip, and thus EMV cards resist carding.
Online Card Fraud
Conventional Card Not Present (CNP) transactions are vulnerable because, a lot like the old mag stripe cards, they rest on clear text cardholder data. On its own, a merchant server cannot tell the difference between the original card data and a copy, just as a terminal cannot tell an original mag stripe card from a criminal's copy.
So CNP fraud is just online carding.
Despite the simplicity of the root problem, the past decade has seen a bewildering patchwork of flimsy and expensive online payments fixes. Various One Time Passwords have come and gone, from scratchy cards to electronic key fobs. Temporary SMS codes have been popular but were recently declared unsafe by the Communications Alliance in Australia, a policy body representing the major mobile carriers.
Meanwhile, extraordinary resources have been squandered on the novel “3D Secure” scheme (MasterCard “SecureCode” and “Verified by Visa”). 3D Secure take-up is piecemeal; it’s widely derided by merchants and customers alike. It is often blocked by browsers; and it throws up odd looking messages that can appear like a phishing attack or other malfunction. Moreover, it upsets the underlying Four Party settlements architecture, slowing transactions to a crawl and introducing untold legal complexities. Payments regulators too appear to have lost interest in 3D Secure.
So why doesn’t the card payments industry go back to its roots, preserve its global Four Party settlement architecture and standards, and tackle the real issue?
Kill two birds with one chip
We could stop most online fraud by using the same chip technologies we deployed to kill off skimming and carding.
It is technically simple to reproduce the familiar card-present user experience in a standard computer. It would just take the will of the financial services industry to make payments by smartcard standard. Computers with built-in smartcard readers have come and gone; they're commonplace in some Eastern European and Asian markets where smartcards are normal for e-health and online voting.
With dual interface and contactless smartcards, the interface options open right up. The Dell E series Latitudes have contactless card readers as standard (aimed at the US Personal ID Verification PIV market). But most mobile devices now feature NFC or “Near Field Communications”, a special purpose device-to-device networking capability, which until now has mostly been used to emulate a payment card. But NFC tablets and smartphones can switch into reader emulation mode, so as to act as a smartcard terminal. Other researchers have recently demonstrated how to read a smartcard via NFC to authenticate the cardholder to a mobile device.
As an alternative, the SIM or other "Secure Element" of most mobile devices could be used to digitally sign card transactions directly, in place of the card. That’s essentially how NFC payment apps works for Card Present transactions – but nobody has yet made the leap to use smart phone hardware security for Card Not Present.
Using a smart payment card with a computer could and should be as easy as using Paywave or Paypass.
Conclusion: Hardware security
All serious payments systems use hardware security. The classic examples include SIM cards, EMV, the Hardware Security Modules mandated by regulators in all ATMs, and the Secure Elements of NFC devices. With well designed hardware security, we gain a lasting upper hand in the criminal arms race.
The Internet and mobile channels will one day overtake the traditional physical payments medium. Indeed, commentators already like to say that the “digital economy” is simply the economy. Therefore, let us stop struggling with stopgap Internet security measures, and let us stop pretending that PCI-DSS audits will stop organised crime stealing card numbers by the million. Instead, we should kill two birds with one stone, and use chip technology to secure both card present and CNP transactions, to deliver the same high standards of usability and security in all channels.
An unhappy holiday for Target customers
A week before Christmas, Target in the US revealed it had suffered a massive payment card data breach, with some 40 million customers affected. Details of the breach are still emerging. No well-informed criticism has yet to emerge of Target's security; instead most observers say that Target has very serious security, and therefore this latest attack must have been very sophisticated, or else an inside job. It appears Target was deemed PCI-DSS compliant -- which only goes to prove yet again the futility of the PCI audit regime for deterring organized criminals.
Security analyst Brian Krebs has already seen evidence of a "fire sale" on carding sites. Cardholder records are worth several dollars each, up to $44 according to Krebs for "fresh" accounts. So the Return on Investment for really big attacks like this one on Target (and before that, on Adobe, Heartland Payments Systems, TJMaxx and Sony) can approach one billion dollars.
We have to face the fact that no amount of conventional IT security can protect a digital asset worth a billion dollars. Conventional security can repel amateur attacks and prevent accidental losses, but security policies, audits and firewalls are not up to the job when a determined thief knows what they're looking for.
It's high time that we rendered payment card data immune to criminal reuse. This is not a difficult technological problem; it's been solved before in Card Present transactions around the world, and with a little will power, the payments industry could do it again for Internet payments, nullifying the black market in stolen card data.
A history of strong standardisation
The credit card payments system is a paragon of standardisation. No other industry has such a strong history of driving and adopting uniform technologies, infrastructure and business processes. No matter where you keep a bank account, you can use a globally branded credit card to go shopping in almost every corner of the planet. This seamless interoperability is created by the universal Four Party settlement model, and a long-standing plastic card standard that works the same with ATMs and merchant terminals absolutely everywhere.
So with this determination to facilitate trustworthy and supremely convenient spending in worldwide, it's astonishing that the industry is still yet to standardise Internet payments! We have for the most part settled on the EMV chip card standard for in-store transactions, but online we use a wide range of confusing, piecemeal and largely ineffective security measures. As a result, Card Not Present (CNP) fraud has boomed. I argue that all card payments -- offline and online -- should be properly secured using standardised hardware. In particular, CNP transactions should either use the very same EMV chip and cryptography as do Card Present payments, or it should exploit the capability of mobile handsets and especially Secure Elements.
CNP Fraud trends
The Australian Payments Clearing Association (APCA) releases twice-yearly card fraud statistics, broken down by fraud type: skimming & carding, Card Not Present, stolen cards and so on. Lockstep Consulting monitors the APCA releases and compiles a longitudinal series. The latest Australian card fraud figures are shown below.
APCA like other regulators tend to varnish the rise in CNP fraud, saying it's smaller than the overall rise in e-commerce. There are several ways to interpret this contextualization. The population-wide systemic advantages of e-commerce can indeed be said to outweigh the fraud costs, yet this leaves the underlying vulnerability to payments fraud unaddressed, and ignores the qualitative problems suffered by the individual victims of fraud (as they say, history is written by the winners). It's pretty complacent to play down fraud as being small compared with the systemic benefit of shopping online; it would be like meekly attributing a high road toll to the popularity of motor cars. At some point, we have to do something about safety![And note very carefully that online fraud and online shopping are not in fact two sides of the same coin. Criminals obtain most of their stolen card data from offline retail and processing environments. It's a bit rude to argue CNP fraud is small as a proportion of e-commerce when some people who suffer from stolen card data might have never shopped online in their lives!]
Frankly it's a mystery why the payments industry seems so bamboozled by CNP fraud, because technically it's a very simple problem. And it's one we've already solved elsewhere. For Card Not Present fraud is simply online carding.
Skimming and Carding
In carding, criminals replicate stolen customer data on blank cards; with CNP fraud they replay stolen data on merchant servers.
A magstripe card stores the customer's details as a string of ones and zeroes, and presents them to a POS terminal or ATM in the clear. It's child's play for criminals to scan the bits and copy them to a blank card.
The payments industry responded to skimming and carding with EMV (aka Chip-and-PIN). EMV replaces the magnetic storage with an integrated circuit, but more importantly, it secures the data transmitted from card to terminal. EMV works by first digitally signing those ones and zeros in the chip, and then verifying the signature at the terminal. The signing uses a Private Key unique to the cardholder and held safely inside the chip where it cannot be tampered with by fraudsters. It is not feasible to replicate the digital signature without having access to the inner workings of the chip, and thus EMV cards resist carding.
Online card fraud
Conventional Card Not Present (CNP) transactions are vulnerable because, like the old magstripe cards themselves, they rest on cleartext cardholder data. On its own, a merchant server cannot tell the difference between the original card data and a copy, just as a terminal cannot tell an original magstripe card from a criminal's copy.
Despite the simplicity of the root problem, the past decade has seen a bewildering patchwork of flimsy and expensive online payments fixes. Various One Time Passwords have come and gone, from scratchy cards to electronic key fobs. Temporary SMS codes have been popular for two-step verification of transactions but were recently declared unfit for purpose by the Communications Alliance in Australia, a policy body representing the major mobile carriers.
Meanwhile, extraordinary resources have been squandered on the novel "3D Secure" scheme (MasterCard SecureCode and Verified by Visa). 3D Secure take-up is piecemeal; it's widely derided by merchants and customers alike. It upsets the underlying Four Party settlements architecture, slowing transactions to a crawl and introducing untold legal complexities.
A solution is at hand -- we've done it before
Why doesn't the card payments industry go back to its roots, preserve its global architecture and standards, and tackle the real issue? We could stop most online fraud by using the same chip technologies we deployed to kill off skimming.
It is technically simple to reproduce the familiar card-present user experience in a standard computer or in digital form on a smart phone. It would just take the will of the financial services industry to standardise digital signatures on payment messages sent from a card holder's device or browser to a merchant server.
And there is ample room for innovative payments modalities in online and mobile commerce settings:
All serious payments systems use hardware security. The classic examples include SIM cards, EMV, the Hardware Security Modules mandated by regulators in all ATMs, and the Secure Elements of NFC mobile devices. With well-designed hardware security, we gain a lasting upper hand in the cybercrime arms race.
The Internet and mobile channels will one day overtake the traditional physical payments medium. Indeed, commentators already like to say that the "digital economy" is simply the economy. Therefore, let us stop struggling with stopgap Internet security measures, and let us stop pretending that PCI-DSS audits will stop organised crime stealing card numbers by the million. Instead, we should kill two birds with one stone, and use chip technology to secure both Card Present and CNP transactions, to deliver the same high standards of usability and security in all channels.
Until we render stolen card data useless to criminals, the Return on Investment will remain high for even very sophisticated attacks (or simply bribing insiders), and spectacular data breaches like Target's will continue.
IBM Zurich researcher Diego Ortiz-Yepes recently revealed a new Two Factor Authentication technique in which the bona fides of a user of a mobile app are demonstrated via a contactless smartcard waved over the mobile device. The technique leverages NFC -- but as a communications medium, not as a payments protocol. The method appears to be compatible with a variety of smartcards, capable of carrying a key specific to the user and performing some simple cryptographic operations.
This is actually really big.
I hope the significance is not lost in the relentless noise of new security gadget announcements, because it's the most important new approach to authentication we've seen for a long long time. The method can easily be adopted by the NFC and smartcard ecosystems with no hardware changes. And with mobile adoption at a tipping point, we need true advances in security like this to be adopted as widely and as quickly as possible. If we ignore it, future generations will look back on the dawn of m-business as another opportunity lost.
A golden opportunity to address an urgent problem
Mobile represents the first greenfield computing platform in thirty years. Not since the PC have we seen a whole new hardware/software/services/solutions environment emerge.
It's universally acknowledged that general purpose PCs and Internet Protocol for that matter were never engineered with security much in mind. The PC and the Internet were independently architected years before the advent of e-commerce, and without any real sense of the types of mission critical applications they would come to support.
I remember visiting Silicon Valley in 1998 when I was with KPMG's pioneering PKI team, working on, amongst other things, the American Bar Association e-signature guidelines. We were meeting with visionaries, asking Will anyone ever actually shop "online"?. Nobody really knew! But at startling speed, commodity PCs and the Internet were indeed being joined up for shopping and so much more: payments, and e-health, and the most sensitive corporate communications. Yet no mainstream computer manufacturer or standards body ever re-visited their designs with these uses in mind.
And so today, a decade and a half on (or a century in "Internet years") we have security boffins earnestly pronouncing "well you know, there is no identity layer in the Internet". No kidding! Identity theft and fraud are rife, with as yet no industry-wide coordinated response. Phishing and pharming continue at remarkable rates. "Advanced Persistent Threats" (APTs) have been industrialised, through malware exploit kits like Blackhole which even come with licensing deals and help desk support that rivals that of legitimate software companies. Even one of the world's very best security companies, RSA, fell victim to an APT attack that started with an trusted employee opening a piece of spam.
But in the nick of time, along comes the mobile platform, with all the right attributes to make safe the next generation of digital transactions. Most mobile devices come with built-in "Secure Elements": certifiably secure, tamper-resistant chips in which critical cryptographic operations take place. Historically the SIM card (Subscriber Identification Module) has been the main Secure Element; "NFC" technology (Near Field Communications) introduces a new generation of Secure Elements, with vastly more computing power and flexibility than SIMs, including the ability to run mission critical apps entirely within the safe chip.
The Secure Element should be a godsend. It is supported in the NFC architecture by Trusted Service Managers (TSMs) which securely transfer critical data and apps from verified participants (like banks) into the consumers' devices. Technically, the TSMs are a lot like the cell phone personalisation infrastructure that seamlessly governs SIM cards worldwide, and secures mobile billing and roaming. Admittedly, TSMs have been a bit hard to engage with; to date, they're monopolised by telcos that control access to the Secure Elements and have sought to lease memory at exorbitant rates. But if we collectively have the appetite at this time to solve cyberspace security then mobile devices and the NFC architecture in particular provide a once-in-a-generation opportunity. We could properly secure the platform of choice for the foreseeable future.
The IBM Two Factor Authentication demo
Before explaining what IBM's Ortiz-Yepes has done, let's briefly review NFC, because it is often misconstrued. NFC technology has a strong brand that identifies it with contactless payments, but there is much more to it.
"Near Field Communications" is a short range radio frequency comms protocol, suited to automatic device-to-device interfaces. To the layperson, NFC is much the same as Bluetooth or Wi-Fi, the main difference being the intended operating range: 10s of metres for Wi-Fi; metres for Bluetooth; and mere centimetres for NFC.
NFC has come to be most often used for carrying wireless payments instructions from a mobile phone to a merchant terminal. It's the technology underneath MasterCard PayPass and Visa payWave, in which your phone is loaded with an app and account information to make it behave like a contactless credit card.
The NFC system has a few modes of operation. The one used for PayPass and payWave is "Card Emulation Mode" which is pretty self explanatory. Here an NFC phone appears to a merchant terminal as though it (the phone) is a contactless payment card. As such, the terminal and phone exchange payments messages exactly as if a card was involved; cardholder details and payment amount are confirmed and send on to the merchant's bank for processing. NFC payments has turned out to be a contentious business, with disconcertingly few success stories, and a great deal of push-back from analysts. The jury is still out on whether NFC payments will ever be sustainable.
However, NFC technology has other tricks. Another mode is "Reader Emulation Mode" in which the mobile phone reads from (and writes to) a contactless smartcard. As an identity analyst, I find this by far the more interesting option, and it's the one that IBM researchers have exploited in their new 2FA method.
According to what's been reported at CNET and other news outlets, a mobile and a smartcard are used in what we call a "challenge-response" combo. The basic authentication problem is to get the user to prove who she is, to the app's satisfaction. In the demo, the user is invited to authenticate herself to an app using her smartcard. Under the covers, a random challenge number is generated at a server, passed over the Internet or phone network to the mobile device which in turn sends it over NFC to the smartcard. The card then 'transforms' the challenge code into a response using a key specific to the user, and returns it to the app, which passes it back to the server. The server then verifies that the response corresponds to the challenge, and if it does, we know that the right card and therefore the right user is present.
NOTE:Technically there are a number of ways the challenge can be transformed into a response code capable of being linked back to the original number. The most elegant way is to use asymmetric cryptography, aka digital signatures. The card would use a unique private key to encrypt the challenge into a response; the server subsequently uses a public key to try and decrypt the response. If the decrypted response matches the challenge, then we know the public key matches the private key. A PKI verifies that the expected user controls the given public-private key pair, thus authenticating that user to the card and the app.
Further, I'd suggest the challenge-response can be effected without a server, if a public key certificate binding the user to the key pair is made available to the app. The challenge could be created in the app, sent over NFC to the card, signed by the private key in the card, and returned by NFC to be verified in the app. Local processing in this way is faster and more private involving a central server.
Significance of the demo
The IBM demonstration is a terrific use of the native cryptographic powers now commonplace in smartcards and mobile apps. No hardware modifications are needed to deploy the 2FA solution; all that's required is that a private key specific to the user be loaded into their smartcard at the time the card is personalised. Almost all advanced payments, entitlements and government services cards today can be provisioned in such a manner. So we can envisage a wonderful range of authorization scenarios where existing smartcards would be used by their holders for strong access control. For example:
- Employee ID card (including US Govt PIV-I) presented to an enterprise mobile app, to access and control corporate applications, authorize purchase orders, sign company documents etc
- Government ID card presented to a services app, for G2C functions
- Patient ID or health insurance card presented to a health management app, for patient access to personal health records, prescriptions, claims etc.
- Health Provider ID card presented to a professional app, to launch e-health functions like dispensing, orders, admissions, insurance payments etc,
- Credit Card presented to a payment app, for online shopping.
I can't believe the security industry won't now turn to use smartcards and similar chipped devices for authenticating users to mobile devices for a whole range of applications. We now have a golden opportunity to build identity and authorization security into the mobile platform in its formative stages, avoiding the awful misadventures that continue to plague PCs. Let's not blow it!
The Australian Payments Clearing Association (APCA) releases card fraud statistics every six months for the preceding 12m period. Lockstep monitors these figures and plots the trend data. The latest stats were released this week, for FY 2012.
Here's the latest picture of Australian payment card fraud growth over the past seven financial years FY2006-12.
Compared with FY2011:
- Total card fraud is up 25%
- CNP fraud is up 27%
- CNP fraud represents three quarters (72%) of all card fraud.
- Card Not Present fraud as a proportion of all fraud remains at just under three quarters (72%).
As with the CY2011 stats we discussed last July, card fraud has again grown in all categories at once, not just Card Not Present, and this is unusual. The explanation may be a burst of skimming and counterfeiting in late 2011 which would be reflected in both the FY2012 and CY2011 numbers.
APCA's press release this week notes that card fraud has dropped in the past six months, contrasting financial 2012 ($189M) with calendar 2011 ($198M). This may not be a statistically valid comparison. We should expect seasonal buying habits will cause asymmetries within 12 months, making FY against CY a case of apples and oranges. Indeed, this looks like the first time APCA themselves have plotted CY and FY stats together. It certainly makes the latest figures look better.
Time will tell whether the trend is changing. The long term trend is that CNP fraud has grown at 38% p.a. on average, from $27M in FY2006 to $189M in FY2012. A 5% drop in the past six months may not mean much. The $189M loss most recently reported is probably close to the true trend.
APCA says "Broadly, the value of CNP fraud reflects growing retail activity in the online space, with many more businesses ... moving online". That's true but the question is: What will we do about it? Bank robbers rob banks because that's where the money is. Think about high road tolls: they reflect the popularity of driving, but we don't put up with them!
In any case, a cardholder's exposure to CNP fraud has nothing to do with whether they themselves shop online! Stolen card data are replayed online by criminals because they can. The online boom provides more places to use stolen cards but it's not where the criminals get most of their cards. Instead, it appears that account numbers are mostly obtained from massive database breaches at processors and large bricks-and-mortar retailers, like Heartland Payments, Global Payments, and Hannaford. So it's not fair to play down CNP fraud as relating to the cost of going digital, because it hurts people who haven't gone digital.
I'm afraid payments regulators seem light on ideas for actually rectifying CNP fraud.
Until recently, APCA actively promoted 3D Secure (Verified by Visa or Mastercard SecureCode) as a response to CNP fraud. In June 2011, APCA went so far as to say "retailers should be looking at a 3D Secure solution for their online checkout". But their most recent press release makes no mention of 3D Secure at all.
It looks to me that 3D Secure, after many years of disappointing performance and terrible take-up, is now too contentious to rate a mention from Australia’s regulators.
In my view, the industry needs to treat CNP fraud as seriously as it did skimming and carding. The industry should not resign itself to increasing rates of fraud just because online shopping is on the rise.
CNP fraud is not a technologically tough problem. It's just the digital equivalent of analogue skimming and carding, and it could be stopped just as effectively by using chips to protect cardholder data online.
Seasoned security analysts know the card fraud trends, but the latest stats in Australia are surprisingly bad.
The Australian Payments Clearing Association (APCA) releases card fraud statistics every six months for the preceding 12m period. Lockstep monitors these figures, crunches them and plots the trend data.
Here's the latest picture of Australian payment card fraud growth over the past six calendar years CY2006-11.
For the first time in many years, card fraud has grown in all categories at once. The ratio of Card Not Present fraud to all fraud remained steady at just under three quarters. Any up-turn in skimming and counterfeiting is surprising given the strong penetration of chip-and-PIN cards in Australia, although most ATMs here still use the stripe and remain vulnerable to carding. Still, CNP fraud remains the preferred MO of organised crime, and its cost grew by 61% from 2010 to 2011.
"Innovation" is a topical notion in Australian payments systems circles, but for the most part innovation is confined to back end systemic improvements to interbank settlements. Regulators take a light touch on the user side. The market is fostering innovative payments applications in mobile devices, but so far, security still proves to be too hard. APCA's only position on security is to wait and see what happens when 3D Secure comes to Australia. Given that nothing has stood in its way, and CNP fraud is doubling every two years, the very absence of 3D Secure here should be worrying to the regulators.
Yet another breathless report crossed my desk via Twitter this morning where the rise of mobile payments is predicted to lead to cards and cash "disappearing", in this case by 2020. Notably, this hyperventilation comes not from a tech vendor but instead from a "research" company.
So I started to wonder why the success of mobile payments (or any other disruptive technology) is so often framed in terms of winner-take-all. Surely we can imagine new payments modalities being super successful without having to see plastic cards and cash disappear? It might just be that press releases and Twitter tend towards polar language. More likely, and not unrelatedly, it's because a lot of people really think this way.
It's especially ironic given how the term "ecosystem" tops most Buzzword Bingo cards these days. If commentators were to actually think ecologically for a minute they'd realise that the extinction of a Family or Order at the hands of another is very rare indeed.
Last week saw the biggest credit card data breach for a while, with around 1.5 million card numbers being stolen by organised crime from processor Global Payments [updated figures per Global Payments investor conference call, Apr 2nd].
So now there will be another few rounds of debate about how to harden these cardholder databases against criminal infiltration, and whether or not the processor was PCI-DSS compliant. Meanwhile, stolen card numbers can be replayed with impugnity and all the hapless customers can do is monitor their accounts for suspicious activity -- which can occur years later.
These days, the main use for stolen payment card data is Card Not Present (CNP) fraud. Traditional "carding" -- where data stolen by skimming is duplicated onto blank mag stripe cards to fool POS terminals or ATMs -- has been throttled in most places by Chip-and-PIN, leaving CNP as organised crime's preferred modus operandi. CNP fraud now makes up three quarters of all card fraud in markets like Australia, and is growing at 40-50% p.a.
All card fraud exploits a specific weakness in the Four Party card settlement system shown below. The model is decades old, and remains the foundation of internationally interoperable cards. In a triumph of technology neutrality, the four party arrangement was unchanged by the advent of e-commerce. The one problem with the system is that merchants accepting card numbers may be vulnerable to stolen numbers. Magnetic stripe terminals and Internet servers are unable to tell original cardholder data from copies replayed by fraudsters.
The most important improvment to the payments system was and still is to make card numbers non-replayable. Chip-and-PIN stops carding thanks to cryptographic processes implemented in hardware (the chip) where they cannot be tampered with, and where the secret keys that criminals would need are inaccessible. In essence, a Chip-and-PIN card encrypts customer data within the secure chip (actually, digitally signs it) using keys that never leave the confines of the integrated circuit. Even if a criminal obtains the card holder data, they are unable to apply the additional cryptographic transformations to create legible EMV card-present transactions. This is how Chip-and-PIN stemmed skimming and carding.
CNP fraud is just online carding, fuelled by industrial scale theft of customer records by organised crime, like the recent Global Payments episode. While the PCI-DSS regime reduces accidental losses and amateur attacks, it remains powerless to stop determined criminals, let alone corrupt insiders. When card numbers are available by the tens of millions, and worth several dollars each ($25 or more for platinum cards) truly nothing can stop them from being purloined.
The best way to tackle CNP fraud is to leverage the same hardware based cryptography that prevents skimming and carding.
Lockstep Technologies has developed and proven such a solution. Our award winning Stepwise digitally signs CNP transactions within an EMV chip, rendering card details sent to the merchant non-replayable. The merchant server checks a Stepwise CNP transaction using standard public key libraries; a valid Stepwise transaction can only have come from a genuine Chip-and-PIN card under the control of its holder.
All serious transaction and payments systems use hardware cryptography. The classic examples include mobile telephones' SIM cards, EMV chips, the Hardware Security Modules mandated by financial regulators in all ATMs, and the "secure elements" of NFC devices. With well designed hardware security, we gain a robust upper hand in the cybercrime arms race. So let's stop struggling with flabby distracting systems like 3D Secure, and let's stop pretending that PCI-DSS audits will stop organised crime getting hold of card numbers by the million. Instead, let's kill two birds with one stone and use chips to secure both card present and CNP transactions.
Stepwise creates uniquely secure, fast and easy-to-use CNP payments. It has zero impact on the security certifications of digital signature capable EMV chips, and zero impact on existing four party card processing arrangements.
For more details, please see http://lockstep.com.au/technologies/stepwise.