Over 3.2 million customers across 19 banks were exposed to financial fraud last week. Despite alerts to expect hacks as part of cyber warfare in retaliation to India’s surgical strikes against Pakistan, we seem to have been caught unprepared. In fact, over the last five years we have seen the exposing of banks to hack attack through what may be termed technology terrorism. Should you be worried?
Central to the banking profession is trust. It takes decades for banks and bankers to build the trust; it takes minutes to wipe it away. Respected banks have been built on trust reinforced by focus on core banking and its values. Increasing cases of banking fraud plague the Indian banking system and perhaps it’s time for the bankers to step back and examine the root of the problem.
Over the last five years, the banking sector is being “disrupted” by technology. Or so we are told by technology pundits who want to bring ease of onboarding customers, ease of scaling outreach, sometimes wrongly called financial inclusion, and ease of anytime, anywhere banking. Some even call this as the WhatsApp moment of banking.
Clayton Christenson, Harvard professor who coined the phrase “disruptive innovation”, has repeated that disruption was about reaching the un-served and the under-served. Disruption was not about destroying the existing business processes using technology.
Since the incorporation of the National Payments Corporation of India (NPCI), a non-government public company, in December 2008 and the notification of the Unique Identification Authority (UIDAI) of India as an autonomous body of the Planning Commission of India in January 2009, technology has been pushed at speed, sometimes without regard to core banking or its values. Technology has been pushed in the banking sector a variety of methods without a full understanding of what such technology may result in. In the past five years, selective technologies have been pushed without adequate assessment about the risks it may expose customers and banks to.
The common point between the reported banks whose customers are among the 3.2 million customers compromised in the alleged debit card hack last week is that they are part of the 17-19 banks of NPCI’s RuPay and UPI initiatives.
The Reserve Bank of India (RBI) succumbed to UPA-era pressures from the UIDAI in January 2011 by allowing the Aadhaar or UID number for its Know Your Customer (KYC) process. The RBI had maintained that the use of the Aadhaar number was in conflict with the Prevention of Money Laundering Act (PMLA), the Basel Standards for maintaining customer information and its own extant guidelines. The RBI, however, placed accounts opened with the Aadhaar number to the same restrictions of small bank accounts under the PMLA. The UIDAI talked of the use of Aadhaar numbers for KYC as “using technology for the ease of onboarding of new customers”. Strangely, Nilekani, currently advisor to the NPCI and former chairman of UIDAI, has recently commented on this changing proprietary authentication to public authentication.
Not happy with the restrictions, the UIDAI pressed to push the RBI to lift the restrictions placed on accounts opened with Aadhaar numbers under the PMLA. It was simultaneously working with the NPCI to develop an Aadhaar Based Payment System that would use the Aadhaar associated with a bank account as a financial address to do electronic money transfers from one Aadhaar number to another. The UIDAI succeeded, in September 2011 through the Department of Revenue, Ministry of Finance, in persuading the RBI to suspend the restrictions of small bank accounts under the PMLA on bank accounts opened solely with Aadhaar numbers. The UIDAI also succeeded in making the RBI further to accept eKYC or remotely using information associated with an Aadhaar number as KYC. According to the UIDAI, eKYC brings scale to the ease of onboarding customers. Private fintech companies have been advocating smartphones for e-KYC and described onboarding as “self service”.
Citing the ease of telecom, Nilekani says dual SIM phones make switching SIMs practically free. He highlights that only one in 20 SIMs constitutes a new user. This, in practice, may enable at least 20 identities and associated bank accounts to be managed by one person. The UIDAI eKYC documents require that no data is kept by those initiating the eKYC other than the response from UIDAI. This response from the UIDAI is to be kept for at least six months for audit purposes. The complex network of agencies providing eKYC, the absence of audit processes being in place and the complete absence of permanent record of customer information leave no means to verify and audit the existence of real persons in whose name millions of bank accounts may have been opened.
HACKING THE -BANKING SYSTEM
The NPCI, in the meanwhile, has pushed several technology instruments around the Aadhaar Based Payment System including RuPay cards and Unified Payments Interface (UPI). According to the NPCI, these technologies provide virtual payment address, account portability, ease the transfer of money in real time, allow both payer and payee to initiate payments, replace smart cards with mobile apps, replace point of sale and operate across different platforms. This means using a smartphone, a payee or a payer can transfer money across virtual payment addresses instantly. The originating or receiving account number in such transactions becomes untraceable if the mapping of virtual payment addresses is altered. This facilitates unauditable money transfers. Combined with the ability for a payee to initiate a transfer remotely from anywhere, puts deniability of transactions by an unwilling payer near impossible.
In pushing the Aadhaar number as the magic, its proponents forget that this is merely a random number allotted to demographic and biometric data submitted by private parties. It has never been verified or audited to confirm the identity, address or even existence of persons. Furthermore, if it was the biometric that uniquely identified anyone, making it the safest identifier, why would a number ever be needed to query the UIDAI database? The biometric should suffice.
Bankers recognise receiving money in accounts not traceable to originators or receivers as money laundering. This is usually done to park black money, fund organised crime and terrorism, take bribes or to siphon public funds.
The common point between the reported banks whose customers are among the 3.2 million customers compromised in the alleged debit card hack last week is that they are part of the 17-19 banks of NPCI’s RuPay and UPI initiatives. Just weeks before, the NPCI had denied a major breach of customer data of banks on its Aadhaar based platforms. Using the NPCI’s UPI, smartphones can be used as a remote cash dispenser to virtual addresses. The payment can be initiated by the payer or payee. There will be very limited trace left by such a transaction. It is likely that such a hack may appear as withdrawals from ATMs at various locations.
The media has been buying the NPCI line that debit cards were hacked across 19 banks through ATM malware. No one has been looking for the common point for customer money transfers for the 3.2 million customers across 19 banks. ATMs are certainly not such a common point, nor can they facilitate withdrawals in China, as reported in some media reports. Clearly the payment system that is common to these banks may have been used to compromise customers.
Interestingly, the Computer Emergency Response Team (CERT) and the National Critical Information Infrastructure Protection Centre (NCIIPC) cautioned banks more than two weeks ago, in view of India’s surgical strikes on the border, to be on heightened alert. According to reports the NCIIPC has not received any reports of the incidents as required under the rules. With every hour of delay in getting independent cyber forensic experts to investigate such incidents vital evidence to protect the national banking system and ensure national interest is lost.
With the government reportedly placing the Consolidated Fund of India within the ambit of such technology “disruptions” by the NPCI, a non government public company, the questions are not only of conflict of public and private interests, but even more seriously about not how but when will India in the grip of compromisable technologies witness a cyberwar that will destroy the banking and financial system in minutes. Only Prime Minister Narendra Modi can ensure that such a fate be avoided, by ensuring a rigorous examination by unbiased experts on possible technology-related vulnerabilities in the banking system.
Dr Anupam Saraph, a professor, future designer and former governance and IT adviser to former Goa Chief Minister Manohar Parrikar and the Global Agenda Councils of the World Economic Forum, can be found on Twitter at @AnupamSaraph