In the wake of Apple Pay launch, one interesting document captured a rare occasion: an insider described as “key developer at major bank” having a moment of honesty, voicing blunt opinions on Apple, ISIS/Softcard, Google Wallet and upcoming chip & PIN transition in the US. According to this anonymous source, one of the key selling points for Apple Pay from banks’ perspective is privacy. Apple provides the wallet software and operates a service, but it does not learn about user transactions. Given how often this presumed advantage is mindlessly repeated in other articles, it is worth drilling into the question: who knows exactly what the card-holder purchased? [Full disclosure: this blogger worked on Google Wallet security]
For the paranoid, cash remains the most privacy-friendly solution— perhaps to be rivaled by Bitcoin one day when it is more widely accepted as a payment scheme. It is peer-to-peer in the old-fashioned way: from customer to merchant. All of the other mainstream payment methods involve some other intermediary, giving that third-party an opportunity to learn about transactions. Some of the participants are visible in plain-sight, others operate behind the scenes. Checks involve the bank where the customer maintains an account. Less obviously they also involve a clearing-house responsible for settling checks among banks.
Credit card networks have more moving pieces. There is the issuing bank underwriting the card used by the consumer. There is the acquiring bank receiving the payment on behalf of the merchant. Typically there is also a payment processor linking the merchant to the acquirer. In the middle orchestrating this flow of funds on a massive scale is the card network: Visa, MasterCard, American Express or Discover. These players all have visibility into the total payment amount and the merchant. In most cases they also know the identity of the card-holder. Most banks fall under some type of know-your-customer (KYC) rules designed to deter terrorist financing, which involves validating the identity of customers prior to doing business. This is true even for gift/prepaid cards that are funded ahead of time with no credit risk for the issuer. That means at a minimum the issuing bank knows the true identity of the person involved in a transaction, which is not surprising. Less obvious is the fact it is frequently exposed to other parties along the way as part of the “track data” encoded on the card, since track data travels from the merchant point-of-sale to the payment processor and eventually into the network. (Cardholder name need not be identical to legal name, in which case there is a slight privacy improvement in the use of a pseudonym.) At the end of the day, it is a safe bet that Visa knows consumer Jane Smith has purchased $38.67 worth of goods from corner grocery store on Saturday, October 18th in Tribeca. No wonder NSA is on friendly terms with payment networks, tapping into this vast data-set for intelligence purposes.
But equally important is what none of these participants know: line-level transaction data. They have no visibility into the contents of Jane’s shopping-cart. There are some qualifications to this general principle, edge cases where contents can be inferred. For example if there is only one item at a coffee-shop that rings up for $3.47, that is exactly what the customer ordered. Fortunately the more general case of trying to come up with combination of goods tallying up to a given total is a surprisingly intractable computer-science challenge, known as the subset-sum problem. It is further complicated by the fact that many goods have identical price, a given sum could correspond to millions of different combinations of items and for goods priced by weight— such as produce— there is not even a single assigned price. There is also some information leaked by the pattern of transactions. For example, restaurants often will perform two transactions when settling a bill: one to authorize the original amount and one that collects the final tab including the gratuity. In other words, the bad news is both your bank and Visa can see whether you have been stingy or generous on tips. Yet they still have no idea exactly what you ordered, whether it was inline with FDA dietary recommendations (although there is likely a strong correlation with the establishment involved, which explains why insurers are peeking into patient credit-card records) or how many glasses of wine accompanied that meal.
That information flow is not changed by chip-and-pin, or for that matter NFC payments using a phone.** There is still a bank responsible for issuing the “card,” even when the physical manifestation of the card on a piece of plastic has been replaced by cryptographic keys residing on a mobile device. There is a more elaborate payment “protocol.” Before the cashier swiped the magnetic-stripe on the card, reading static information; now there is an interactive process where the point-of-sale register communicates back-and-forth with the phone over NFC. Does that somehow disclose more information? It turns out the answer is no. EMV standards prescribing that complicated song-and-dance have no provision for item-level information to be communicated. The phone can not receive this information from the POS and neither can the POS transmit it upstream when requesting payment authorization.
So why the persistent harping by our banker friend on the contrast between Apple Pay and Google Wallet? Because in the latter design, Google is effectively the “issuer” of the card used for payment. As described in earlier posts, Google Wallet switched to using virtual cards in 2012. These cards are only “virtual” in the sense that the consumer does not have to know about them. But as far as the merchant and payment network are concerned, they are very real. From the merchant point-of-view, the consumer paid with a MasterCard issued by Google. Behind the scenes Google proxies this transaction in real-time to the actual card the consumer added to their wallet. This is why Google has same visibility into purchases as an issuing bank such as Bank of America with Apple Pay or Softcard: transaction amounts and patterns, but not line-level items.
This answer is still unsatisfactory for one reason: we have limited ourselves to information that is exchanged as part of the purchase transaction defined by EMV specifications. Could a mobile wallet application on a smart-phone obtain more information out-of-band?
** There is one privacy improvement in that cardholder names are typically redacted from the simulated “track data” created by NFC transactions.