EMV transition will still leave security gaps

This October, US merchants and payment providers are scheduled to switch to new, more secure, chip-based payments.

EMV transition will still leave security gaps

This October, US merchants and payment providers are scheduled to switch to new, more secure, chip-based payments. But financial transactions aren't going to become safer overnight, since the majority of merchants are still not ready for the switch, magnetic stripes aren't actually going away, some merchants link loyalty programs to payments, and because the new chip technology will do nothing to improve the security of online shopping.

According to a recent report from Javelin Strategy & Research, as many as 75 percent of merchants will miss the October deadlines.

Smaller merchants, in particular, are far behind, with cost cited as the biggest obstacle to migration, according to Javelin.

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A similar survey by POS vendor Lightspeed showed that 45 percent of US retailers had no migration plans, or weren't sure about their plans. While in August, Wells Fargo released the results of a nationwide survey conducted with Gallup that showed only 31 percent of small businesses who accept point-of-sale payments were ready for chip cards, and only 29 percent of the rest were going to be able to make the October deadline.

Overall, Aite Group analyst Judy Fishman estimates that only 59 percent of point-of-sale terminals will be ready this year.

Merchants who don't switch in time become liable for any fraud that is made possible by their older systems.

According to Aite Group, counterfeit credit card fraud at the point of sale currently totals about $3 billion a year, a cost now picked up by issuing banks.

The fraud is expected to reach $3.6 billion by the end of this year, according to Aite analyst Thad Peterson, and the banks won't be picking up the full tab anymore.

"When the liability shift occurs, nearly half of all merchants will be vulnerable to counterfeit card fraud, and the liability will be on them," he said in a statement.

No end in sight for mag stripes

Despite the penalties, some merchants will be slow to switch. As a result, payment cards will continue to have magnetic stripes on them, in addition to the chips, for the foreseable future.

"So if someone gets their hands on your card, they can still copy all the information from the card because it's there for backwards compatibility," said Jerry Irvine, CIO at security firm Prescient Solutions.

Once that information is copied, it can be used to create new, cloned, magnetic stripe cards.

And merchants will be able to accept them, as their card readers will still be able to read the magnetic stripe, again for backwards compatibility.

"As long as the cards are still issued with dual modability -- as long as the card issuer is going to include both the stripe and the magstripe -- the magstripe data can still be compromised in the traditional manner," said Owen Wild, global marketing director for security at NCR Corp. "It is important to continue to be vigilant about potential skimming attacks."

And it's not just the magnetic stripes that will continue to be supported during the transition period -- so will signatures.

While Europe and other geographics have mostly switched over to chip-and-pin, the US is first moving to chip-and-signatures, since many customers don't have or don't know the PIN number for their credit cards.

"It is still going to be more secure than magstripe-initiated transactions, but does still leave some aspects of vulnerability compared to chip-and-pin," said Wild.

Misplaced loyalties

To really protect themselves from payments-related liability, merchants need to ensure that they never touch any payment data or personally identifiable information at all. This is typically done through a combination of encryption and tokenization.

This is one of the issues that posed the biggest challenges to Elavon, an Atlanta payments provider.

"Traditionally, for a lot of our customers, having information that identifies who their customers are is important," said Lori Haakmeester, Elavon's senior vice president of product innovation. "And now we're saying, don't keep that information, don't transmit that information, keep yourself as protected as possible."

Merchants want to have a relationship with their customer, she said.

"It has really highlighted some of the things about their infrastructure that today nobody wants to have an issue with," she said. "That has posed some challenges."

This is one of the reasons that the migration might take longer than expected, she added.

"October is going to come, but a lot of the work that's going to happen to get everyone fully up and running will continue after that," she said.

"If I go into a shop and pay for something, that moment should not be used to personalize my experience," said Malte Pollmann, CEO at security vendor Utimaco GmbH. "It is different if there is a second card, a loyalty card, to track some of that data."

Merchants who issue their own credit cards and use them both for payments and to track customers purchase histories should separate them out, he suggested.

"There is no safe way to combine both," he said.

Online migration

Since crooks will now have a much harder time with physical point of sale attacks, they're likely to switch their focus to online transactions.

And this has, in fact, happened in other countries when they migrated from magnetic stripes to chip cards.

In Canada for example, which made the switch in 2008, annual counterfeit card fraud dropped by CA $134 million by 2013 -- while card-not-present fraud actually increased by CA $171 million during the same time period, according to the Aite Group.

Aite predicts that card-not-present fraud, which includes online and phone-based purchases, will double in the U.S. by 2018.

John Dancu, CEO at fraud prevention firm IDology, recommends that companies roll out layered fraud-prevention solutions, and share information with other players in the industry.

"Collaboration is the most effective way to fight fraud," he said.

Copyright © 2015 IDG Communications, Inc.

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