Evan Schuman's StorefrontBacktalk

The court held that the bank’s procedures were “commercially reasonable” and that the merchant had accepted the risk of fraudulent transfers and had authorized the bank to make such transfers. The Magistrate noted that “the record is sufficient to establish that there are no genuine disputes with regard to the material facts as to whether BSB comported with industry or ‘commercial’ standards and whether those standards were reasonable standards intended to result in fair dealing. The parties and their respective experts are in agreement that the Federal Financial Institutions Examination Council’s 2005 Guidance (FFEIC 2005 Guidance) provides the applicable standards. The Court finds that BSB provided unrefuted evidence that it comported with industry standard as set forth in the FFEIC 2005 Guidelines, in particular as they relate to the use of multi-factor identification in providing for security procedures. Finally, although it is surely self-evident, the Court finds the standards included in the FFEIC 2005 Guidelines with regard to security procedures were reasonable standards intended to result in fair dealing.”

The FFIEC is the banking industry group that sets out security standards for banks, much the same way the PCI Security Council sets them for credit card transactions. By following the FFIEC Guidelines for “multi-factor identification” the Court found, the bank acted reasonably, and had no liability. Bank wins. Merchant loses. Nuff said.

But the Magistrate failed to inquire further. The FFIEC guidelines recommend “multi-factor” authentication. Mostly, we authenticate people with a user ID (something a person knows) and a password (something else a person knows). That’s simply not multi-factor authentication. What’s worse, for ease of access or use (particularly for mobile banking) we often store one or both of these in the computer or device, meaning that we now have one factor or even zero factor authentication.

If someone can access our device (Trojan horse, break in, lost iPhone) they can access the banking application, or guess the password. Multi-factor authentication, which would be commercially reasonable, would typically mandate authentication by something you know (password, ID, etc.) AND something you are (biometric, fingerprint, retina scan) OR something you have (token, device, card, etc.) What the Missouri bank proposed was not multi-factor authentication, but multi-person authentication. In fact, by hacking the bank, the bad guys would have just as easily stolen one person’s user ID and password as two people – especially if they had to input the authentication at roughly the same time and/or in roughly the same place. It is the illusion of security.

The bank is right about one thing, though. This kind of “multi-factor” authentication, which is not really multi-factor authentication and is certainly not the kind of multi-factor authentication anticipated by the FFIEC, is the commercial standard. It is what every bank does. And that makes it “commercially reasonable” because, well 10,000 lemmings can’t possibly be wrong.

And as long as the banks don’t have any liability for the losses, they really have little reason to improve security, or adopt new enhanced security technologies, despite the fact that they–much more than the merchant customers–are aware of the risks associated with online banking and how to prevent them. True multi-factor authentication is too cumbersome and expensive, especially when it is the merchant who is screwed in the end.

That’s not to say that both merchants in general and the escrow company in particular could not have done more to prevent the unauthorized transfer. After all, the hacker initiated the transaction from the merchant’s computer, so the IP address matched what the bank was looking for. But when the bank representative saw a $440,000 transfer (after validating that the transferee was not on the terrorism watch list, or other “black lists” by the government, that the money wasn’t going to a prohibited country, and most important, that the merchant had money in their account) maybe the bank rep could have said, “Gee, that’s really weird.” Brings new meaning to “don’t ask, don’t tell.”

Security is a shared responsibility which should offer a shared risk of loss. What is “commercially reasonable” is in the eye of the beholder–especially if the beholder is a bank. Right now, the message from the banking community to the merchants is “Hey guys, you’re on your own. And hey, let’s be careful out there.”

If you disagree with me, I’ll see you in court, buddy. If you agree with me, however, I would love to hear from you.