Calling for a uniform approach to card fraud, offline and on

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 cryptographic techniques discussed here can be implemented in chip-and-PIN smartcards or mobile phones with secure elements. Both phones and smartcards can now be easily interfaced over NFC to laptops of tablet computers, for a pay-wave type of user experience. Or the secure element in a phone could be used in app to safeguard card-not-present payments from the device.

The original article in 2012 was written for smartcards, but the equivalence of smartcards and smart phones is noted in square rackets throughout this updated blog..


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 payment card industry has 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, clumsy 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 types of chip and cryptography as do card present payments, with tamper-resistant transactions being digitally signed and sent direct from a client to a server, just as they are sent from a smart card to a merchant terminal.

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 actively secures the data transmitted from card to terminal. EMV works by 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 on a transaction 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, just like the old mag stripe cards, they use 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 mag strip terminal cannot tell an original 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.

“3D Insecure”

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 payment card 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 [smart phone or 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.

But with dual interface and contactless smartcards, the interface options open right up. Most mobile devices now feature NFC (“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 enabled 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 or smart phone] 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 stop-gap 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 in smart phones and smartcards to secure both card present and CNP transactions, and thus deliver the same high standards of usability and security in all channels.