Towards a more secure payments ecosystem

August 2018

The rapid adoption of digital payments in India and the entry of new payment channels have made risk management an important focus area in the payments ecosystem. Any breach in security of payments is likely to affect the diligently built confidence of customers. As the government pushes for wider adoption of digital payments across multiple use cases, incidences of fraud may make customers wary of security within payment systems and thus it is necessary for all participants in the ecosystem to continuously make efforts to make payments security and risk management a priority for their business.

With stakes getting high to secure payment systems, all players involved – banks, regulators, card networks, e-commerce companies, FinTechs are actively working to protect their customers. We look at steps being initiated towards more enhanced risk & security measures in payments-

Regulators across the world

Regulators across the world, with their guidelines on authentication, data storage & privacy, customer identification & verification etc. are playing an active role at an overall level to prevent breaches. With respect to data privacy, implementation of PSD2 & GDPR in EU & EEA and recommendation of Justice Srikrishna Report in India will change the way companies collect & process personal data, with control over data sharing resting with individuals. Similarly, to address privacy concerns around Aadhaar, UIDAI has mandated use of 16 digit Virtual ID (VID) instead for Aadhaar for customer verification.

With growing digital transactions

With growing digital transactions, banks are exploring near real-time data analytics and block chain combined with cognitive learning to mitigate risks arising in payments systems. Fintech and technology companies are developing solutions based on adaptive and step-up authentication for e-commerce transactions. Banks and financial institutions have initiated educational programs for customers and employees to forewarn about various risks in the system and basic steps to mitigate the same. To reduce repudiation risk, banks are encouraging customers to opt for digital signatures while making high-value inter-bank transactions through net banking. Traceability of transactions in blockchain reduces repudiation risk of the transacting parties and thereby has become one of the key points for the financial institutions to further explore this technology.

Even though PIN based transactions have gained traction globally

Even though PIN based transactions have gained traction globally, push for NFC based payments have witnessed encouraging response in countries like Australia, Canada, Sweden & Japan. However, there have been a few security concerns over NFC based payments such as capturing details by bringing POS terminals close to customers in crowded areas. This has prompted card schemes to offer tokenization to banks and payment service providers, which is an attempt in the right direction to make transactions more secure. Recent Government of India communication to banks on issuing NFC based cards is going to provide a fillip to these form factors. Card manufacturing companies have developed biometric based cards and one such company is also conducting a pilot project in Japan.

Overall, apart from the direct financial impact of fraud, costs related to prevention and revenue/opportunity loss due to fraud should also be attributed to the total cost of risk management for an organization. The strategy of how to manage these costs vary greatly on the type of industry, business model, geography, payment methods and type of fraud involved.

There have been a quite a few case studies where financial institutions and payment companies across the globe have deployed advanced security measures for safer and more secure payment transactions.

Case study I: Addressing cross-border money laundering

Problem Statement: A large global bank had faced massive penalties due to its failure to control money-laundering.

Solution: To ensure compliance in the future at manageable costs, it implemented a solution from a firm specialized in Anti-Money-Laundering. The solution helped the bank reduce number of false positives by 20%, without reduction in number of cases reported for suspicious activity. This saved the bank thousands of hours in investigation of compliance risks and was able to meet many of the required regulations, thereby saving hefty monetary penalties

Case study II: Upgrading fraud detection system

Problem Statement: A leading bank in New Zealand was impacted by a sudden spike in fraud volumes.

Solution: It found that its point- based fraud detection system was detecting only a fraction of the fraud attempts launched against the bank. It worked with a leading solution provider to upgrade its systems to detect patterns in behavior of banking customers and use subtle deviations for identifying frauds. This provided speed and agility to the bank in spotting fraud schemes and attacks before they occurred and better adapt its defenses to new fraud threats.

Case study- III: Addressing customer frauds

Problem Statement: One of the leading payment gateways in Turkey was facing huge losses of fraudulent chargebacks claimed on credit card transactions.

Solution: It realised that a significant portion of the chargebacks was due to friendly frauds. Customer carried out transactions themselves and after receiving items, claimed refund. To evaluate such transactions, it implemented solution from a new age technology provider. It helped to identify whether a transaction is fraudulent or genuine based on a trust score. This score was generated through machine learning algorithms, a user’s browsing behaviour analysis, device fingerprinting, location profiles and other evaluation parameters. The PG was able to improve on the decline rate by 50% and fraud chargebacks subsequently decreased by 65%.

Assessing Risks from new technologies

As players in the payments industry launch new instruments to facilitate payments along with ramping up the acceptance points, it also increases associated potential risks and threats to data privacy. This has an impact on customer confidence on the payment ecosystem. Some of the scenarios which pose risk are illustrated below -

Device Capability

Devices have limited memory and processing power to consume well established security protocols for today’s standards. This makes it difficult to push regular security updates to devices.

Data Leakage & Privacy

New age payment touchpoints have the potential to generate large amounts of data, representing a potential target for cyber criminals. Stolen data is likely to contain personal information that can then be used for unlawful surveillance and tracking users.

DDoS Attacks

Default credential settings and open remote access make it easier for attackers to take over the device remotely. Typically, IoT devices require minimal or no user interaction, which makes it even more difficult for users.

Towards a mature risk management framework

To continuously secure systems against everincreasing sophisticated attacks, organizations have to think beyond the obvious in deploying security framework. A change at the organization level is critical to support new age systems deployed by banks. Illustrated below are a few areas which firms can evaluate, in order to be future ready.

Enhancing scope of strategic partnerships

Last few years have witnessed multiple strategic partnerships between financial institutions and firms in consumer-facing areas such as new age payment instruments, mobile products, trading and insurance products. There is a huge scope to partner with firms offering new-age solutions in areas such as security, data privacy and fraud risk management. These firms leverage power of big data, artificial intelligence and advanced predictive modelling to detect security risks and frauds at various touchpoints in the payment lifecycle, at early stage and help mitigate them.

Rapid adoption of new age payment instruments will continue to pose challenging security questions to firms. In order to protect the customer and ensure that their confidence in the payment ecosystem is maintained, stakeholders need to invest in newer and safer tools and technologies. They also need to educate their partners to develop a mature risk management framework which will address risks associated with all new age payment products. As it is always said “Risk cannot be eliminated, it can only be mitigated”, it is necessary to continuously assess risks and provide a safe, secure and future-ready transacting environment.

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With inputs from Neha Jaeel, Shekhar Lele, Kanishk Sarkar, Arun Suresh, Jaya Gupta, Amol Bhat, Vivek Rawell

Contact us

Vivek Belgavi

Partner, India FinTech Leader, PwC India

Mihir Gandhi

Partner, Payments and FinTech, PwC India

Tel: +91 99 3094 4573

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