How Market Forces Will Alter Payment ProcessingBy Adrian Lane
I was drafting a post last week on credit card security when I read Rich’s piece on How Market Forces Can Fix PCI. Rather than looking at improving PCI-DSS from a specification-centric perspective, he presented some ideas on improving its effectiveness through incentivizing auditors differently. A few of the points he raised clarified for me why looking at market drivers such as this are the only way we are going to understand the coming security changes to this industry. It’s a good post and highly relevant given the continuing rises in notable breaches and PCI compliance costs for merchants. But more than anything else, for me the post solidified why I think we are having the wrong discussion about the advancement of payment security. We are riding a 20th century credit card processing system that was great at the dawn of the POS terminal, but is simply broken from a security perspective for ‘card not present’ and Internet electronic commerce situations.
Adrian Phillips of Visa was recently quoted as saying “… PCI-DSS has proven to be a highly effective foundation of minimum security standards when properly implemented across all systems handling cardholder data.” That phrase is laced with caveats, and it should be, because if you follow PCI-DSS closely, you hit the minimum set of requirements for basic security with significant investment. It’s not that I am against PCI-DSS per se, it’s just that we should not need PCI-DSS to begin with. We have gotten so wrapped up in the discussion on securing this credit card data and the payment system that we have somewhat forgotten that the merchant does not need this information to conduct commerce. We are attempting to secure credit card related information at a merchant site when it is unnecessary to keep it there. The payment process for merchandise should be considered two separate relationships: One between the buyer and the issuing bank, and the other between the issuing bank and the merchant. Somewhere along the way the lines were blurred and the merchant was provided with the customer’s financial information. Now the merchant is also required to keep this data around for dispute resolution, spreading the risk and cost of securing customer financial information. If I were looking for ways to make my business more efficient, I would be looking to get rid of this effort, responsibility, and expense ASAP!
Merchants must investment massively to prop up the security on a flawed system. If the pace of fraud and breaches continue, sheer economic force will push merchants for an alternative rather than suffer along with increasing expenses and risks. As Brian Krebs recently reported, there has been a 95% increase in the number of credit and debit card fraud cases, with no specific indicator showing a slowdown.
My point with this entire rant? I think we are starting to see the change happening now. Rich’s argument that market forces could improve PCI audits is entirely valid, and we could see slightly improved site security. But if market forces are going to materially alter the security situation as a whole, it will be in the slow erosion of vendors participating in the system we have today, in favor of something more efficient and cost effective. First with Internet commerce, and eventually with POS. Securing credit card data is an expensive distraction for merchants, which directly reduces profits. While many large companies offset this expense with revenue from data mining, the credit card number no longer needs to be present to successfully analyze transaction data. If I was running a commerce web site site I would certainly be looking to external payment processing service like PayPal to offload the liability and need to be party to the credit card data. And as PayPal’s fee structure is on par with more traditional credit card payment services, you get the same service with reduced liability. Looking at the number of small and mid-sized merchants I see using PayPal, I think the trend has already begun and will continue to pick up speed. I am also seeing new payment processing firms spring up with payment models more agile and appropriate to electronic commerce.
I had an email exchange with the CTO of a security vendor on this subject the other day, and the question was raised “Will there be EMV-like smart cards in our future? I doubt it. That type of security helps half of the equation: authenticating the buyer, and given current implementations, only at POS terminals. It does not stop the data breaches or resultant fraud. EMV was a very good proposal that never took off, and while it could be helpful with future efforts, a more likely authentication mechanism will be something like Verisign authorization tokens. This form of authentication (user name/password plus One Time Password) may not be perfect, but far in excess of what we have for credit card processing today, and requires very little modification for Internet transactions.
If market forces are going to drive payment processing security forward, I think this is a more plausible scenario. As always, current stakeholders will strive to maintain the status quo, but cheaper and better eventually wins out.