If Apple Can’t Stop One Fraudster, Can It Ever Challenge Visa?

Written by Frank Hayes
July 18th, 2012

Apple’s status as the Great Fruit Hope for alternative payments took a hit this week, after it failed to stop a Russian hacker who broke the iPhone’s security for many in-app purchases. It’s roughly the equivalent of customers somehow tweaking their payment cards, and then swiping them at an in-store PIN pad, which tells the POS the transaction has gone through—except the card is never charged.

Apple’s billion-dollar third-party payments business takes a larger than Visa cut, sets less flexible than Visa operating rules, and then offers less help than Visa in securing transactions. And this is the company that’s supposed to rescue retail from Visa’s interchange rates?

The in-app purchase security hole was exploited by a Russian hacker named Alexey Borodin, who went public with his attack on July 11. The exploit is unusual in that the customer isn’t the one victimized. In fact, the iPhone user has to actively cooperate with the man-in-the-middle attack by using fraudulent security certificates and even a specially rigged DNS server that misdirects transactions away from Apple to Borodin’s own server.

Then when a customer makes an in-app purchase, the transaction is sent to Borodin’s server, which generates fake receipts that tell the app to deliver whatever has been purchased. (Apple doesn’t allow in-app purchases of physical goods or services outside the app, so purchases are typically upgrades, game currency or items used inside a game or other app.)

The fraud doesn’t work with all in-app purchases—to avoid it, app developers can set up their own servers (at their own expense) to confirm receipts. But even that’s not foolproof.

And considering that Apple set up the easy-to-exploit process and rakes in 30 percent of the proceeds from each valid in-app transaction, developers might expect a little more help in securing it—especially because estimates of how much in-app transactions now bring in are well above $1 billion per year.

For retail chains hoping Apple might offer a real alternative for in-store payments, this should be something between disheartening and terrifying. Apple already does a huge business in third-party transactions—far more than Google Wallet and PayPal in-store combined. But it’s so insecure that customers and a lone fraudster can gang up on in-app retailers to spoof transactions with impunity.

Even more disappointing (or frightening) is the fact that Apple has been unable to shut down the fraud.


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Most Recent Comments

Why Did Gonzales Hackers Like European Cards So Much Better?

I am still unclear about the core point here-- why higher value of European cards. Supply and demand, yes, makes sense. But the fact that the cards were chip and pin (EMV) should make them less valuable because that demonstrably reduces the ability to use them fraudulently. Did the author mean that the chip and pin cards could be used in a country where EMV is not implemented--the US--and this mis-match make it easier to us them since the issuing banks may not have as robust anti-fraud controls as non-EMV banks because they assumed EMV would do the fraud prevention for them Read more...
Two possible reasons that I can think of and have seen in the past - 1) Cards issued by European banks when used online cross border don't usually support AVS checks. So, when a European card is used with a billing address that's in the US, an ecom merchant wouldn't necessarily know that the shipping zip code doesn't match the billing code. 2) Also, in offline chip countries the card determines whether or not a transaction is approved, not the issuer. In my experience, European issuers haven't developed the same checks on authorization requests as US issuers. So, these cards might be more valuable because they are more likely to get approved. Read more...
A smart card slot in terminals doesn't mean there is a reader or that the reader is activated. Then, activated reader or not, the U.S. processors don't have apps certified or ready to load into those terminals to accept and process smart card transactions just yet. Don't get your card(t) before the terminal (horse). Read more...
The marketplace does speak. More fraud capacity translates to higher value for the stolen data. Because nearly 100% of all US transactions are authorized online in real time, we have less fraud regardless of whether the card is Magstripe only or chip and PIn. Hence, $10 prices for US cards vs $25 for the European counterparts. Read more...
@David True. The European cards have both an EMV chip AND a mag stripe. Europeans may generally use the chip for their transactions, but the insecure stripe remains vulnerable to skimming, whether it be from a false front on an ATM or a dishonest waiter with a handheld skimmer. If their stripe is skimmed, the track data can still be cloned and used fraudulently in the United States. If European banks only detect fraud from 9-5 GMT, that might explain why American criminals prefer them over American bank issued cards, who have fraud detection in place 24x7. Read more...

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