What is wrong with Apple Pay? NFC and cross-channel fraud (2/2)

[continued from part #1]

(Full disclosure: this blogger worked on Google Wallet 2012-2013)

Mobile payment systems as implemented today muddy the clean lines between “card-present” and “card-not-present” interactions. Payments take place at a brick-and-mortars store with the consumer present and tapping an NFC terminal. But the card itself is delivered to the smart-phone remotely, via over-the-air provisioning. Consumers do not have to walk into a bank-branch or even prove ownership of a valid mailing address. They may be required to pass a know-your-customer or KYC test by answering a series of questions designed to deter money laundering. But that requires no physical presence, being carried out within a web-browser or mobile application.

Arguably this is not too different from traditional plastic-cards: they are also “provisioned” remotely, by sending the card in an envelope via snail mail. Meanwhile the application takes place online, with the customer completing a form to provide necessary information for a credit check; effectively card-not-present information. The main difference is that applying for a new credit card has a much higher bar than provisioning an existing card to a smart-phone. In one case, the bank is squarely facing default risk: the possibility that the consumer may run up a hefty bill on the new card and never pay it back. In the latter scenario, there is no new credit being extended— NFC purchases are charged against preexisting line of credit, with the same limits and interest rates as before. There is no reason to suspect that an otherwise prudent and restrained customer will become a spendthrift merely because they can also spend their money via tap-and-pay.

Consequently the burden of proof is much lower when proving that one owns an existing card vs proving that one is a good credit risk for an additional card based on past loan history. Applying for a new line of credit typically requires knowledge of social-security number (perhaps the most misused piece of quasi-secret information, having been repurposed from an identifier into an authenticator) billing address and personal information such as date of birth. Adding an existing card into an NFC wallet is much simpler, although variations exist between  different implementations. For example Google Wallet required users to enter their card number, complete with CVV2 to prove ownership. Apple Pay goes one step further, borrowing an idea from Coin: users take a picture of the card with the phone camera. This is largely security theater. Any competent carder can create convincing replicas that will fool a store clerk inspecting the card in his/her hand; a blurry image captured with a phone camera is hardly an effective way to detect forgeries. It is more likely a concession from Apple to issuing banks. More important, no amount of taking pictures will reveal magnetically encoded information from the stripe. Neither Apple Pay or Google Wallet have any assurance of CVV1. (Interestingly Coin can verify that because it ships with an actual card-reader that users must swipe their cards through— a necessity because Coin effectively depends on cloning mag-stripes.)

Bottom line: all of the information required to provision an existing  card to a mobile device for NFC payments can be obtained from a card-not-present transaction. For example, it can be obtained via phishing or compromising an online merchant to observe cards in flight through their system. For the first time, it becomes possible to “obtain” a new credit card using only card-not-present data lifted from an existing card. That payment instrument can be now used to go on a  spending spree in the real-world, at any retailer accepting NFC payments. Online fraud has breached what used to be a Chinese-wall and crossed over into bricks-and-mortar space.


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