Who carries the risk of e-fraud?

Banks are rushing to offer more services online - as long as customers bear the risk in an uncertain environment. Nicholas Bohm...

Banks are rushing to offer more services online - as long as customers bear the risk in an uncertain environment. Nicholas Bohm investigates

In the offline, paper driven world, customers knew that in most cases they would be covered as banks would bear the loss. That is because it is very difficult to forge someone's handwritten signature so well that they have to bear the resulting loss.

Banks do pay out on forged cheques from time to time, mainly where they are for small sums and close examination is not worthwhile.

But even where a forgery has at first succeeded - despite close examination - it is very rare for a forgery to be good enough to deceive fully equipped scientific document examination.

That means that the bank will bear the loss, since it has no authority to debit the customer's account with a cheque the customer did not sign.

The bank can manage its risk by deciding how much effort to put into signature verification, in the knowledge that sufficient effort will produce almost any required level of assurance. It becomes a familiar exercise in cost/benefit analysis.

Digital signatures have completely different characteristics, which are not yet widely understood, let alone used. There is a single verification process, which either succeeds or fails. There is no opportunity for a bank to put more or less effort into the process, and secure more or less certainty of result.

If it was impossible for a forged digital signature to be verified, this would present no problem. But preventing the forgery of a digital signature requires users to keep a cryptographic signing key or other information secret and under their sole control, very difficult to do with the equipment available at the moment.

The user can give the encryption key away, let someone else use it, or carelessly allow someone else access to it.

They may suffer an attack by malicious software that surreptitiously steals a copy of the key and any access control to it, despite all the care the user took and without the user knowing about or having any evidence of the act. Recent virus attacks have shown how vulnerable modern systems are to just such attacks.

Even where the user has a PC with a smartcard reader, and the key is held in a smartcard which never leaves the user's possession, malicious software in the PC might surreptitiously cause several instructions to the bank to be signed where the user is aware of only one of them.

Allocating the risks

The difficulty is that all of these cases are indistinguishable by the bank, which knows only that the resulting digital signature verifies correctly. It is understandable that banks wish to treat them identically, and at best offer the customer the chance to prove he or she was not at fault.

But while a bank faced with a claim that a cheque has been forged has the resources to employ scientific document examination with every prospect of getting a decisive result one way or the other, a bank customer does not. They are not necessarily well placed to get a scientific security examination of the system that may have been attacked, and in any case, cleverly written malicious software might leave no trace of its own past existence or operations.

And the fact that a customer could have been at fault, for example by giving the key away, should not justify the bank in expecting the customer to prove that this wasn't the case. A customer could equally claim that a genuinely signed cheque was in fact a forgery, but this possibility is not enough to shift the burden of proof from the bank.

The liability process is in danger of becoming so complicated that customers faced with complicated procedures are more likely to shun the process altogether.

If the banks wish to offer their customers electronic online banking, with the massive savings in bank overheads which can result, then they ought not to expose them to new risks which customers should not be expected to manage.

Yet some banks are using standard terms and conditions to do just that. The following terms taken from those of the Egg online banking service demonstrate how the customer can end up bearing all the risk. Phrase (3.2) "you will be responsible for any instruction in writing or by telephone or Internet which we receive and act on, even if it was not given by you", and phrase (5.1) "even if the order was given by someone else using your security information and passwords" use language designed to transfer onto the customer the whole risk of fraud by a third party.

Is it fair to make it the customer's problem?

According to Regulation 5 (1) of the Unfair Terms in Consumer Contracts Regulations 1999, a contractual term which has not been individually negotiated shall be regarded as unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties' rights and obligations arising under the contract, to the detriment of the consumer.

For the reasons above, expecting customers to meet the very difficult technical burden of proving that a digital signature forgery occurred without fault on their part can only cause just the sort of "significant imbalance" contemplated by the regulation above. And, for the banks to claim, as they do, that they will be reasonable in enforcing their unfair powers, is not good enough. The Regulations make unfair terms completely unenforceable, and so the banks will be left to carry the risk.

What about the future?

If the banks are to carry the risk of third party fraud, they will have the necessary incentive to devise some means of reducing the risk (something the customer can hardly be expected to do).

If the only important relationship were that between the customer and the bank, a significant part of the problem could be solved by providing customers with tamper-evident hardware devices for use in the verification of digital signatures. Some banks are doing this now as a way of keeping important security secrets out of the vulnerable part of the infrastructure, the customer's PC.

But this works only between two parties, and does not solve the wider problem of secure signatures in electronic commerce generally.

This problem will become pressing when merchants - who customers buy from - are no longer willing to accept the risk of customers repudiating - i.e. denying online transactions. This could happen soon if the credit card system begins to increase the costs that merchants bear in that event.

If credit cards become less acceptable, and electronic cash schemes such as Mondex, WorldPay and Paypal continue to make no headway, then, a general purpose secure digital signature will become a necessary foundation for electronic commerce.

Such a device would need a secure operating system (which has yet to be written), and would need to be held in a form which could not be altered.

It would also need to be tamper-resistant and tamper-evident. It would have to generate its own keys, but never export private keys. It would benefit from secure access control through fingerprint or iris scanning.

There is nothing too far-fetched in such a specification, even if it is well beyond anything yet available on the market.

But it will never be built unless the risks of fraud fall on the backs of those in a position to commission the research, finance the development and subsidise the deployment of the device.

An important part of the future of electronic commerce depends on getting the risk allocation right.

Nicholas Bohm is a member of the advisory council of the Foundation for Information Policy Research and of the Law Society's electronic commerce working party

This article is based on a paper by Nicholas Bohm, Ian Brown and Brian Gladman available at fipr.org

3.1 We may establish security procedures with you either by post, telephone or Internet (when available). You must keep your security details and password secret. If you make written records of any security details or password, you must disguise them so that they cannot easily be understood by anyone else.

3.2 You must tell us as soon as possible if:

  • you think that someone else knows your security details or password;

  • you have forgotten your security details or password;

  • you think that someone else (other than a joint account holder or authorised person) is trying to use your account.

    Until you tell us, you will be responsible for any instruction in writing or by telephone or Internet which we receive and act on, even if it was not given by you. Normally we will pay back into your account the amount of any payments we make after you have told us. But, if we can show that you have acted fraudulently or have been grossly negligent or have not kept your security details and password secret you will be responsible for all payments we make and all losses on your account. We will have no other liability to you.

    3.5 We will do all that we reasonably can to prevent unauthorised access to our Internet banking service and make sure that it is secure.

    3.8 You will tell us as soon as you can if you find any failure, delay or error in our Internet banking service, especially in the sending or receiving of instructions. Our records of your Internet instructions will be conclusive unless there is a clear mistake.

    Likewise, Condition 5, dealing with "taking money out of your accounts", is also relevant:

    5.1 We can make payments and account transfers on instructions you give us:

  • by using any card we have provided on your account;

  • on documents you or an authorised person have signed (but not copies or facsimiles);

  • by telephone and Internet (when available), subject to our withdrawal limits, as long as we have
  • checked your identity from the security information and passwords and even if the order was given by someone else using your security information and passwords.

    Online Banking - How the top Internet banks have fared

    Bank Parent Launched Problems
    Smile Co-op Oct 1999 None
    Egg Prudential Oct 1998 Log-off glitch leaves client details exposed
    Cahoot Abbey National Jun 2000 Site crashes on first day
    Barclays Barclays Nov 1999 Suffers July security glitch, exposing a/c details
    Intelligent Finance Halifax Due Sept Launch put back from July over capacity fears

    The Risk Issue


  • Banks bear loss of forged cheques, because it is rare for forgeries to be good enough to prevail over a customer's rejection of a signature

  • Banks can manage risk by deciding how much to spend on signature verification

  • Customers are generally covered by banks' stance

    Online transactions

  • Banks know that customer's PCs are insecure against security threats such as virus attacks, but they still put the onus of proof on them

  • Contracts unfairly "weighted" towards banks, because customers unlikely to be able to prove their case over technical issues with digital signatures

    Why banks want us online

    Cost to a bank of carrying out a transaction:

    Branch $1.07

    Telephone $0.52

    ATM $0.27

    PC Banking $0.015

    Internet $0.01

    Source: Booz-Allen Hamilton survey of US financial institutions with Web site

  • Read more on IT risk management