To put this into context, PCI has unquestionably improved retail security in the U.S. and few have suggested a concrete alternative approach that wouldn't bring with it even worse problems. Like the criminal courts, a system can be very far from perfection and still be the best of all alternatives. It's also true that when security choices are made, some vendors are not going to be happy with the new rules. Even with all of that said, the directness and intensity of the speech by Magtek CEO Mimi Hart is worthy of note.
Hart argued that PCI compliance has no safe harbor and that if a breach happens, retail IT execs will be punished whether or not they went through the PCI-compliance program. "Your board of directors won't care that you followed PCI. You will still be fired. An entrepreneur's Board of Directors can't spell PCI," she said.
"The PCI Security Standards Council is not a standards making body by our industry's definition. It makes rules. It is not inclusive, nor consensus building, nor open like ANSI and ISO. It has an advisory board that is informed what new rules were made last week, just before they're announced to the public," Hart said. "PCI is a private rules company with a very pious persona. The PCI DSS is not a standard, it's a strategy. It is an agent of the brands, who are its owners. It exists solely to serve their needs. Make no mistake about it. Its stated mission is to protect cardholder data, but its true purpose is to delay, deny, deflect and distract. It is the ultimate preserver of the status quo and a serious obstacle to innovation."
Any group trying to improve security by getting everyone to agree to a set of approaches and minimal specs is going to have to focus on compromise and the lowest common denominator. That's the policy decision made by the community, the industry. There are times when innovation and cutting edge are essential and there are times—as the technology matures—when standardization and interoperability become even more critical. Then, at the next stage of growth, it's time for more innovation, but only on top of common elements that all are working from. Although Hart's point is valid, it needs the broader context.
Hart continued: PCI "exploits the relative weakness of the merchants, vendors and processors. And it does this all in the righteous name of 'consumer protection.' This fox in sheep's clothing has no interest in curtailing fraud. After all, 'No Fraud' translates to 'No need for PCI' and do not forget that this is a for-profit enterprise."
The PCI Council itself has argued that the endpoint for its objectives has been to dissolve, because it will no longer be needed. But I don't think anyone is predicting that to happen for a very long time, if ever. A legit downside to the current—and almost any other—security approach is that fraudsters evolve and adapt much more quickly than retailers possibly can.
Hart then continued her case for PCI's profit motives. "Remember that the brands make money on every transaction, fraudulent or legitimate. The same organizations that set the interchange rates make the PCI-DSS rules and enforce those rules with the power to levy steep penalties and fines. That's somewhat like the power to be judge, jury and executioner all rolled into one. Is there not something wrong with this picture? PCI has rapidly become a self-perpetuating, self-aggrandizing, profit-motivated authority. It has and will continue to stifle innovation by its often nonsensical rule making."
This is a very valid point.This is a very valid point. Indeed, a potentially more serious issue is the power to choose to not levy those punishments. The inconsistency of the punishments creates an environment where retailers have no certainty of punishment, which undercuts the incentives the fines are supposed to establish. Fines and discounted interchange rates are the only tools PCI has, given that no one really believes Visa would really tell Target, Wal-Mart or Home Depot that they're not allowed to take credit-card payments anymore.
In her speech, MagTek's Hart then zeros in on more Magtek-specific concern, which is the hardship on vendors of having to get existing hardware approved by the Council. She cited as an example card readers MagTek launched in 2005 (pre-PCI days).
"We have also worked for the last two years with many industry players on an ANSI standard for encryption. As of last week, PCI has announced that all magstripe readers will soon be subject to new rules and bureaucratic certifications," she said. "In other words, now all reading hardware will require the PCI blessing from a certified PCI lab. You may think this is a good idea, but it is actually ridiculous."
Her concern is that the process is trying to protect data that is already widely available. "The cardholder data on a magstripe is in the clear. It consists of a bunch of zeros and ones. It is a machine-readable magnetic barcode. Twenty of the characters it contains are printed or embossed on the front of the card. The other sixteen characters can be viewed just as easily. They are not secret. Encryption, no matter how strong, cannot protect data that has already been written on the blackboard. The serial number on a $20 bill cannot be protected with encryption, because anyone can read it. And so you might say, well not everyone can read the data on the stripe, so let's add encryption to protect it. If you think of the data on the magstripe as written in braille rather than binary code, just because you can't read braille does not mean the data is safe."
She continued: "Why should merchants and processors be forced to protect data expensively and needlessly? It starts out in the clear on the card and it ends up in the clear at the brands, but in the middle it's your responsibility to shroud it. And now PCI will dictate just exactly how to do it."
Hart then got pointed again: "We know how to protect the card data and PCI doesn't, or I should say they do know but choose to look the other way. You must understand, PCI is not about fraud reduction or cardholder data protection. Compliance is the name of the game. That's how you are measured—not by fraud reduction."
That last point is quite interesting. It's true, but it's not clear how it would be done or whether it would even advance anyone's objectives. Compliance is, in theory, within the control of a retailer (assuming the retailer has an unlimited supply of money, but that's a different column). Fraud reduction involves what bad guys do, which is out of the control of merchants. It's like protecting a bank. You can buy an ultra-powerful safe and hire armed guards, but if you put enough money in that safe, the criminals will simply outgun you. Fines and other punishments need to be focused on what the retailer can controlHart then moved into a discussion of specific technologies that she thinks should be dealt with. "Two years ago, PCI presented a report that that had been prepared by PricewaterhouseCoopers. It touted encryption and tokenization to aid compliance and reduce scope. That same report said certain technologies had the potential to reduce fraud and even 'eliminate the need for PCI,' but has PCI even considered promoting the technologies that could render themselves useless? The answer is simply 'no.' Cardholder data is but one element of a safe and secure payment system, and it can only be protected by strong authentication. Encryption is a distraction."
EMV, which Visa recently endorsed for the U.S., was her next target. "The promise of EMV is dynamic authentication, but EMV is a 25-year-old protocol for so-called smart cards, which is a cute term for a microprocessor embedded in a piece of plastic. EMV cards are expensive to issue: five to 10 times the cost of a magstripe card. They are expensive to process and will require massive changes to our payment infrastructure, which will take years to implement and billions of dollars. Merchants will need to purchase new terminals at their expense. Consumers and merchants will need to learn new behaviors. And after 10 years or more, what will we have? A card that is still susceptible to cloning. It's just a little piece of silicon, like the processor in my laptop. For security, it relies on complex key management routines. These routines fall under human process control, which we all know can break down rapidly. We have trouble enough with managing keys between terminals and acquirers. Now envision managing keys on every card you issue and ensuring interoperability on every terminal the card may interact with."
Hart then spoke of the EMV card's physical vulnerabilities. "The EMV cards are also fragile. The chip can be destroyed by microwave, by a ball peen hammer, or simply bent or broken in your wallet. They're costly to issue and costly again to reissue. There is little dynamic data, a three-character CVV is all there is between you and the criminals. The PAN is still in the clear, which means PCI still applies. And what value will the U.S. version of EMV bring to E-Commerce fraud? Without a PIN, the user cannot be authenticated. So the cardholder will have a much more expensive card, but one that still carries the PAN, so keeps the merchant in scope of PCI, and adds not a shrivel of security to the online purchase. I am not against Chip-and-PIN, but I do question the business case and the need to so radically change a payment system that 'on average' functions quite well. If the world wants EMV, I say bring in on. It will be good for business. But respect its limitations. If it's dynamic authentication you're looking for, there are far less expensive ways to get it and use it."