The Canadian banking industry recently released the , prepared by the six largest Canadian banks (BMO, CIBC, National Bank, RBC, Scotiabank, TD). The white paper outlines the evolution of mobile payments in Canada, reviews risks associated with various types of mobile payments, and explores potential considerations for the future.

The paper was guided by three overarching principles: the need for security, the need for openness (the mobile payment environment should be open to any mobile wallet on any mobile device) and the desire to support innovation in mobile payments.

Mobile Payment Evolution in Canada

The paper discusses the evolution of mobile payments in Canada, and notes that it is currently still estimated that “fewer than 25% of Canadian consumers have all the required elements to participate in mobile payments”. Challenges to mobile payment adoption include the limited penetration of contactless or NFC (near field communication) point of sale devices, and the lack of interoperability between issuers, mobile devices and mobile network operators.

In considering the evolution of mobile payments, the paper describes as “a fundamental paradigm shift for security” the evolution from traditional SIM-based payments (where the secure element is stored on the mobile device) to Host Card Emulation (HCE) solutions (where the secure element is stored in the cloud). According to the paper, risks associated with SIM-based payments can be rated as either low risk (in the case of technology risk), low to medium risk (reputational risk) or medium risk (operational risk). In contrast, risks associated with HCE mobile payment solutions are rated either as either medium to high (technology risk) or medium (operational risk, reputational risk). Therefore, as HCE-based mobile payment solutions become more prevalent, security risks will likely increase and will need to be managed accordingly.

Open Mobile Wallets: Potential Additional Risks

Open mobile wallets, which would include Apple Pay, Google Wallet, Samsung Pay and, in Canada, UGO Wallet, are mobile wallets that are open to multiple participant issuers (in contrast to proprietary single issuer solutions, such as the Starbucks payment app, or traditional bank apps).

Open mobile wallets involve interactions between many unrelated third parties and could be subject to additional risks as a result, such as the possibility of a higher potential of fraud (due to risks relating to customer identification and verification), risks arising as a result of reliance on third parties (including any token service provider where tokenization is being used) and data privacy and data ownership issues (given the additional data being generated and potentially shared, such as transactional data, location data, etc.). This is particularly the case given the lack of existing standards and certification processes in the industry.

By way of example, Apple Pay earlier this year suffered incidents of fraud, not because of a breach to its security but because the Apple Pay customer verification process allowed fraudsters to register and use stolen cards through Apple Pay. Customer verification will be an ongoing challenge as issuers develop ways to better integrate third party providers into their existing verification processes. With respect to the emergence of new customer identification and validation techniques, such as biometrics, the white paper argues that, at least until the reliability of new techniques is proven, something the “customer knows”, such as a traditional PIN or password, is preferable to something the “customer is”, such as a biometric read.

Proposed Path Forward

The paper indicates that, in order to achieve the guiding principles described above (security, openness, innovation):

• Mobile payments should provide at least the same level of security as traditional chip-and-PIN payments.
• Robust customer identification and verification processes (both at the time of enrollment and at the time of a transaction) are required to protect against payment fraud.
• There needs to be a compelling value proposition to customers. The experience of using mobile payments needs to be as good as, or better, than using traditional plastic cards, for customers to migrate to mobile payments.

Conclusion

The mobile payment landscape has evolved significantly in the past few years in Canada, with banks and non-financial institutions launching both proprietary and open mobile wallets and payment applications, and is expected to continue to evolve quickly, with the anticipated arrival of new payment solutions in Canada (including Apple Pay), continuing developments relating to cloud-based payment solutions, advances in tokenization, and the development of novel customer verification and identification methods (biometrically-based or otherwise). As outlined in the white paper, there remain many risks and challenges in this area which will continue to need to be carefully addressed going forward in connection with such developments.

© McCarthy Tétrault LLP

is a partner in McCarthy Tétrault’s Financial Services Group in Toronto.  is an associate in McCarthy Tétrault’s Business Law Group in Toronto.

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On June 30, 2015, the FFIEC released its cybersecurity assessment tool designed to assist U.S. financial institutions and regulatory examiners identify inherent cybersecurity risks and determine preparedness level of financial institutions.  The cybersecurity assessment tool and other resources can be found .

Background

The FFIEC, which is composed of the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the Consumer Financial Protection Bureau, the National Credit Union Administration and the State Liaison Committee, formed the Cybersecurity and Critical Infrastructure Working Group in 2013 to assess cyber risk and increase awareness among U.S. financial institutions. In 2014, the FFIEC ran a pilot examination program where it assessed the preparedness of over 500 financial institutions. The assessment tool is partly the result of that study.

General Observations

The FFIEC notes cyberattacks have become more common. New platforms, such as cloud and social media, and new technologies, such as mobile devices and applications, are creating new cyberattack opportunities. Attacks are evolving as more information becomes readily available online, allowing attackers to tailor attacks based on the online behavior of their targets.

The release of the Cybersecurity Assessment Tool demonstrates that regulators are becoming increasingly concerned not only about the level of readiness of financial institutions, but also about the capability of financial institutions’ senior management and boards to respond to cyberattacks. As concern over cybersecurity grows, additional pressure is being placed on senior management and the board to ensure the institution is implementing appropriate risk management and governance practices to ensure the right information is communicated to the right people at all times.

The assessment tool is structured as a two-part process. The first part consists of an assessment of the institution’s inherent risk profile according to its type, volume and complexity of technology and connection types; delivery channels; online mobile products and services; organizational characteristics and external threats, without consideration for any mitigating controls already in place.

The second part consists of an assessment of the institution’s cybersecurity maturity in five different risk areas or domains: management and oversight; threat intelligence and collaboration; cybersecurity controls; external dependency management; cyber incident management and resilience. Each domain includes assessment factors, components and declarative statements that enable institutions to identify practices, process and controls in place across five maturity levels: baseline, evolving, intermediate, advanced and innovative.

The assessment is not designed to identify an institution’s overall cybersecurity maturity level. Rather, the tool can be used to understand whether the institution’s risk management practices and controls are aligned with its inherent risk profile, or whether more needs to be done to achieve the desired level of preparedness. As the institution’s inherent risk profile rises so should its maturity level. The preparedness level should be evaluated periodically, in particular when the institution plans to introduce new products or services or modify its business operations. As the FFIEC states “The assessment [tool] provides a repeatable and measurable process for institutions to measure their cybersecurity preparedness over time.”

In Canada, the Office of the Superintendent of Financial Institutions (“OSFI”) has previously issued in 2013 a very detailed . Similarly to the FFIEC assessment tool, the OSFI guidance provides categories for self-assessment in respect of cyber security practices, each of which is divided into different criteria, that cover multiple operational areas of an institutions beyond information technology. Unlike the FFIEC’s assessment tool, the OSFI guidelines are structured as a single-part assessment of six different risk areas, allow institutions to consider mitigating processes and practices already in place, and do not advocate for information sharing among financial institutions. Both tools provide institutions with repeatable steps that can be used to regularly evaluate their existing processes and resources and to determine whether there are any gaps should be addressed to reach the desired level of preparedness in the event of a cyberattack.

© McCarthy Tétrault LLP

is a partner in McCarthy Tétrault's Financial Services Group in Toronto.  is an associate in McCarthy Tétrault's Business Law Group in Toronto.

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