By the end of 2006, U.S. financial institutions were told to comply with the FFIEC’s updated guidance on authentication for Internet banking. This guidance instructed financial institutions to use multi-factor authentication, along with other security controls, for any online applications that allowed "high risk" transactions. Consequently, banks, credit unions, and other organizations hustled to integrate new authentication solutions that could satisfy bank examiners and reduce online fraud.
Did they succeed? One recently published study says no. In a paper titled Trends in U.S. Multi-factor Non-Compliance, Sestus Data Company and BearingPoint Financial Services report that only 4% of the 100 banks sampled consistently required multi-factor authentication. If this sample is representative of all U.S. financial institutions, and I feel fairly comfortable that it is, we appear to have a serious problem.
The main reason for the failing grade comes from conflicting interpretations of the term "multi-factor authentication". As the report points out, 90% of financial institutions have implemented additional authentication requirements in the form of challenge questions. However the FFIEC’s original guidance and subsequent FAQ explicitly require multi-factor authentication solutions to combine at least two of the three authentication factor types: what you know, what you have, and what you are. Combining challenge questions with passwords only builds upon the single factor category of 'what you know'.
So, the big question then becomes why are bank examiners are allowing financial institutions to get away with solutions that don’t meet the defined criteria. Just to be clear, I haven’t heard any official answer to this so I can only share my theories.
The new FFIEC authentication guidance was a pretty big shock to the many financial institutions who had given limited attention to their online application security. I can tell you from experience that some of these organizations were failing to establish and enforce even basic password requirements for customers.
Many financial institutions undoubtedly raised objections when they were told to skip the step of improving passwords altogether and jump directly to implementing multi-factor authentication. Especially when this jump meant investing around $15 - $30 per user before the 2007 deadline. Some of these organizations were tempted to find lower cost solutions that would address some of the FFIEC’s concerns about authentication attacks.
At this point bank examiners could have sat down with the financial institutions and told them that these changes were inadequate. Astonishingly, I haven’t seen or heard anything to indicate that these conversations ever took place.
Maybe bank examiners are at odds with the FFIEC personnel who pushed the requirements for true multi-factor authentication. Maybe they are willing to allow partial compliance with the guidance to see if these stopgap solutions still reduce fraud. They could still come back later and tell banks that they need to improve the ineffective authentication solutions. Maybe the examiners decided too late that the requirements were too drastic and are quietly allowing compromises by financial institutions so the FFIEC can save face.
Regardless of the motive, I don’t like the result. The financial institutions who took the guidance literally are now at a competitive disadvantage to those who didn’t. They probably have better authentication security but they are also likely to have spent more money on a multi-factor authentication solution. People don’t always like what’s good for them, especially when it includes a significant change, and a stronger authentication system may drive some customers to a competitor who has laxer security standards.
This is the wrong message for the government to send to financial institutions and consumers. Financial institutions may drag their feed in complying with any future security requirements until they find out what examiners will really require of them. Both customers and financial institutions will remain exposed to threats longer than necessary during this waiting process.
If you would like to share your perspectives on compliance with the FFIEC’s multi-factor authentication guidance, leave a comment. I’d love to hear your thoughts.
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