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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.

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July 6, 2018

Attack of the Smart Refrigerator

We've all heard about refrigerators that automatically order groceries when they sense the current supply is running low or out. These smart refrigerators are what people usually point to when giving an example of an "internet-of-things" (IoT) device. Briefly, an IoT device is a physical device connected to the internet wirelessly that transmits data, sometimes without direct human interaction. I suspect most of you have at least one of these devices already operating in your home or office, whether it's a wireless router, baby monitor, or voice-activated assistant or "smart" lights, thermostats, security systems, or TVs.

Experts are forecasting that IoT device manufacturing will be one of the fastest growing industries over the next decade. Gartner estimates there were more than 8 billion connected IoT devices globally in 2017, with about $2 trillion going toward IoT endpoints and services. In 2020, the number of these devices will increase to more than 20 billion. But what security are manufacturers building into these devices to prevent monitoring or outside manipulation? What prevents someone from hacking into your security system and monitoring the patterns of your house or office or turning on your interior security cameras and invading your privacy? For those devices that can generate financial transactions, what authentication processes will ensure that transactions are legitimate? It's one kind of mistake to order an unneeded gallon of milk, but another one entirely to use that connection to access a home computer to monitor one's online banking transaction activity and capture log-on credentials.

As one would probably suspect, there is no simple or consistent answer to these security questions, but the overall track record of device security has not been a great one. There have been major DDOS attacks against websites using botnets composed of millions of IoT devices. Ransomware attacks have been made against consumers' home security systems and thermostats, forcing consumers to pay the extortionist to get their systems working again.

Some of the high-end devices such as the driverless cars and medical devices have been designed with security controls at the forefront, but most other manufacturers have given little thought to the criminal's ability to use a device to access and control other devices running on the same network. Adding to the problem is that many of these devices do not get software updates, including security patches.

With cybersecurity issues grabbing so many headlines, people are paying more and more attention to the role and impact of IoT devices. The National Institute of Standards and Technology (NIST) has begun efforts to develop security standards for cryptology that can operate within IoT devices. However, NIST estimates it will take two to four years to get the standard out.

In the meantime, the Department of Justice has some recommendations for securing IoT devices, including:

  • Research your device to determine security features. Does it have a changeable password? Does the manufacturer deliver security updates?
  • After you purchase a device and before you install it, download security updates and reset any default passwords.
  • If automatic updates are not provided to registered users, check at least monthly to determine if there are updates and download only from reputable sites.
  • Protect your routers and home Wi-Fi networks with firewalls, strong passwords, and security keys.

I see IoT device security as an issue that will continue to grow in importance. In a future post, I will discuss the privacy issues that IoT devices could create.

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

September 14, 2015

The Cost of Free Wi-Fi

When I was a teenager, my friends and I were often on the prowl for bargain restaurant offers. The all-you-can-eat buffet at our local Chinese restaurant was a favorite, but every so often we would discover a "free meal deal." We were once reminded by my friend's dad that "nothing in life is free." That quote left a lasting impression on me.

The validity of this quote was hammered home recently during a security discussion I had with a friend on connectivity to the Internet through free public Wi-Fi. Though free public Wi-Fi is, well, free, it has "soft" costs tied to the lack of security in the connection. And these soft causes can quickly lead to the "hard" costs of fraud—from theft of personal information, user names and passwords, or payment credentials, since hackers are easily able to intercept data transmitted over the Wi-Fi network. Beyond this method, which involves a legitimate network, fraudsters can also deploy rogue Wi-Fi networks for the sole purpose of stealing information. And then, once they have that information, the fraudster can use it to access your accounts under your identity.

This does not mean that people shouldn't use free or public Wi-Fi. When I am away from my home, whether I'm at a local coffee shop or on the road at a hotel, I often seek locations with free Wi-Fi. Apparently, I am not the only one. A recent survey by a U.K. hotel chain found that free Wi-Fi was the most important factor for its customers when choosing a hotel. Free Wi-Fi even ranked higher than a good night's sleep!

However, using free public Wi-Fi and trusting it are two different things. It should never be trusted, and therefore users should do everything to protect themselves and their information. Before joining a free public Wi-Fi network, users should ensure that it is a legitimate network offered by a legitimate entity such as a business, municipality, hotel, or airport. Criminals often will use deceptive Wi-Fi names to trick users into choosing bogus Wi-Fi networks, so users should pay close attention to signage promoting Wi-Fi networks or ask staff for help in identifying legitimate networks. The Federal Trade Commission offers detailed advice on protecting yourself against Wi-Fi security risks once you are connected, including:

  • Use a virtual private network, or VPN.
  • Use SSL-encrypted connections by enabling the "Always Use HTTPS" website option.
  • Turn off file sharing.

These risks are not just limited to free public Wi-Fi networks. They are also inherent to any public Wi-Fi network, including paid networks such as the in-flight Wi-Fi that many airlines offer. It is imperative that users of public networks take the necessary steps to safeguard their information, especially while conducting financial transactions. As free public Wi-Fi spots continue to proliferate and more financial transactions move to connected devices, rest assured that fraudsters will continue to exploit this communications channel. Educating users on how to protect themselves using public Wi-Fi is critical to safeguarding financial information.

What are you doing to bring awareness to your customers about public Wi-Fi risks?

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


January 26, 2015

Tackling Fraud with Data

As the dust settles on the 2014 retail holiday season, it isn't surprising to learn that e-commerce was once again the winner. ComScore reported that online holiday spending through December 21 was $48.3 billion, a 15 percent increase over 2013. And there is nothing to suggest that this growth trajectory will flatten. While these trends are encouraging for online retailers' sales departments, they must be challenging for their fraud and loss prevention teams. According to the 2013 Federal Reserve Payments Study, card-not-present fraud rates were approximately three times higher than card-present fraud rates in 2012.

Just before the holiday shopping season, CyberSource released its 15th Annual Online Fraud Management Benchmark Study This 2014 study reveals that merchants improved order conversion through lower rejection rates while keeping their fraud losses stable. Naturally, I was curious about the tools that yielded these results and wondered to what extent they might have changed. Using CyberSource's 2012 study to compare, I found some surprises.

In 2012, validation tools were used the most—79 percent of merchants used a card verification number and 77 percent used address verification. Of the merchants who did not use these tools, 81 percent indicated they planned to implement a card verification number and 61 percent planned to use address verification. While merchants can implement these tools with little cost, their effectiveness, according to the surveyed merchants, is limited.

Given the 2014 report's positive findings, coupled with the expected very high use of card verification numbers and address verification reported in 2012, I was expecting merchants to rate the effectiveness of these tools higher. Interestingly, even though these validation tools remained the most prominent, their usage did not increase as expected, despite the number ofmerchants who planned to implement them following the 2012 study. And there was not a significant increase in their reported effectiveness.

Here's what did change: the use of proprietary data tools such as customer order history, in-house positive and negative lists, and company-specific fraud scoring models. Purchase device tracking tools, such as fingerprinting, also saw an increase in usage, though not as large of an increase as the proprietary data tools. And it is these tools that, generally speaking, are rated as the most effective fraud management tools by the merchants surveyed.

The 2014 study highlighted improved fraud management. I have several of my own highlights. Merchants appear to be more apt and capable of leveraging their own data today than the preceding several years. And they are finding that using this data is more effective in combating fraud than traditional validation services. I think it's important to note that only two tools (device fingerprinting and a fraud scoring model) were selected by more than 50 percent of merchants as most effective. Even though traditional validation services are still highly used and useful, no single tool is a panacea for fraud management. A layered approach using multiple tools and data elements is critical for success. I suspect this trend of merchants using their own customer data to manage CNP fraud will continue. I also expect that data-centric tools will become more effective as merchants become more sophisticated with data analysis.

What is your view on the future role of proprietary data in CNP fraud management?

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


August 26, 2013

Caution, Online Payday Lender Ahead

Payday lenders offer consumers short-term unsecured loans with high fees and interest rates. Payday loans—also referred to as deposit advance loans or payday advances—are a form of credit that some consumers may find appealing for a number of reasons, including an inability to qualify for other credit sources. The borrower usually pays the loan back on the next payday—hence the term "payday loan"—which means the underwriting process typically includes a history of payroll and related employment records.

A growing number of payday lenders operate their businesses virtually. Consumers can obtain loans and authorize repayment of the loans and fees during the same online session. In a typical online payday loan scenario, a borrower obtains a loan and provides authorization for the lender to send Automated Clearing House (ACH) debits to the consumer's account at a later date for repayment. The payday lender's bank can originate the debits through the ACH network. Wire transfer and remotely created checks may be other payment options.

Both state and federal regulators are currently focusing on the payday lending industry to protect consumers from illegal payday loans. Payday lending practices are usually regulated on the state level. Some states prohibit payday lending, while others require lenders to be licensed and to comply with maximum fees, loan amounts, and interest rate caps, among other restrictions. On the federal level, the Dodd-Frank Act has given the Consumer Financial Protection Bureau the authority to address deceptive and abusive practices by payday lenders.

Payday lenders' banks should consider all the risks involved with working with online payday lenders. And they should make sure to incorporate due diligence techniques and to become familiar with the available tools.

Reputation, reputation, reputation
First, there is reputational risk. A payday lender's bank should be aware that a business relationship—including ACH origination activity—with a company making illegal payday loans can damage the bank's image. Reputation can suffer even if the bank is not complicit in the illegal activities of its payday lender customer. But once a financial institution determines that facilitating payments on behalf of online payday lenders falls within its risk management model, it should ensure compliance with applicable laws and regulations. Providing periodic reports on ACH customers to the bank's board of directors is one way to facilitate review of whether these customers' activities remain within the bank's risk management model. It is critical that the bank protect its reputation, as that affects every part of its business.

The importance of know-your-customer practices
The payday lender's bank should also develop and follow adequate due diligence procedures. ACH rules require—and regulatory guidance advises—that banks perform "know your customer" (KYC) due diligence. KYC includes a variety of activities such as assessing the nature of the online payday lender's activities, setting appropriate restrictions on the types of entries and exposure limits for the lender, and monitoring origination and return activity.

Due diligence steps can include: 1) identifying the business's principal owners, 2) reviewing ratings for the business from the Better Business Bureau, consumer complaint sites, and credit service companies, and 3) determining if there have been recent legal actions against the business. A thoughtful review of the lender's website, including the terms of the consumer's authorization agreement as well as promotional materials, is advised. These due diligence practices during onboarding and on an ongoing basis for all merchants—including online payday lenders—help the bank with setting and enforcing appropriate restrictions for the customer and therefore mitigate the risk of the bank discovering a problem when it is too late.

Mitigating problems by being proactive
Banks can develop tools that flag potential problems in-house or obtain them from vendors, ACH operators, or NACHA. In addition, incorporating a process to monitor transactions and returns to identify anomalies can be very useful. An anomaly could, for example, be a sudden uptick in returns or an unusual increase in origination volume or average dollar amount. Detecting anomalies can be a trigger to conduct further research with a customer.

Other tools can be NACHA's originator watch list and vendor-terminated originator databases, which can help banks identify customers that may warrant additional scrutiny. Periodic audits can also be a useful tool to identify rules compliance issues.

For a bank, protecting its reputation is paramount when it is considering offering payment services to high-risk originators like online payday lenders. It should exercise caution, performing risk-based due diligence on new customers and then diligently monitoring current customers so it can identify problems early and address them proactively.

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

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