Analyst: Banks Must Make Credit Card Accounts Useless To Data Thieves

The hack that chain retailer TJX disclosed last week demonstrates that banks must shoulder their share of responsibility and add protection to credit and debit cards, an analyst said Wednesday.

"Banks must own up to this problem and change their payment systems so that, even if data is stolen, it is useless to thieves," says Avivah Litan, an analyst with Gartner.

On Jan. 17, TJX -- which owns hundreds of T.J. Maxx and Marshalls department stores -- said that one or more hackers had broken into its computer network and made off with a still-to-be-determined number of customer records. Those records included credit and debit card account numbers, and in some cases names and driver's license numbers.

The attack, says Litan, appears well-targeted. It's just the latest breach in a numbing round of data losses and thefts that stretch back to early 2005 and one more piece to the portfolios that sophisticated cybercrooks are assembling on consumers by stitching together data stolen by phishing, keylogging, bank and brokerage account takeovers, and retailer system hacks.

"The attacks are getting much more orchestrated and better targeted," says Litan. "It's time to shift strategy. It's clear we can't count on the retailers to secure customer data.

"Retail payment systems were not designed with security in mind. Hackers are finding the weakest links, especially among retailers that have the most sensitive data stored."

It's unrealistic, says Litan, to expect the United States' 5 million retailers to all become experts in security and to change their back-end systems overnight to add security. Her solution? "Banks must own up to the problem and accept responsibility."

Banks already are pressuring retailers to adopt the Payment Card Industry (PCI) data security standard, which is backed by Visa and MasterCard. Progress, however, has been slow.

"We have a few years' experience in PCI now, so we can tell how slow it's going," Litan says. "Only about a third of the largest retailers were compliant as of October 2006. And that's after a few years' work."

To make account data -- such as that filched from TJX -- useless to thieves, Litan advises banks to add one-time password capability to credit and debit cards. Unlike the "chip and pin" standard used in Europe, a one-time password would be much less expensive to add to cards; Litan estimates it would cost about $3 per card.

Equipped with one-time password capability, a credit card would generate a one-use value to complete each transaction at retail or online. That value, or password, would have to match what the card issuer generates before a transaction would be authorized.

"Thieves would have to steal the physical credit card to access the account," says Litan, if one-time password functionality was added to U.S.-issued cards.

"I think there is a real sense of urgency at banks," Litan says. "Fraud officers I talk to would love to see stronger card authentication."

One U.S. bank that Litan would not name but said was "very large" will add one-time password to its debit cards this year, the first major American move in that direction. "I think there's a 70% likelihood that banks will adopt one-time passwords for Internet transactions in 2008," she predicts. "Once the infrastructure is out there, it'll start gradually moving to point-of-sale."

TJX has not released any new details about the break-in since the original disclosure, but Litan's sources have told her that investigators are "close to finding" the hacker. "They'll figure it all out eventually."