Don Quijones: Credit-Cardholders & Bank Customers Burned Again as New IT Chaos Breaks Out in the UK

By Don Quijones of Spain, the UK,and Mexico, and editor at Wolf Street. Originally published at Wolf Street

The payments industry deplores it, but cash is starting to look pretty good, and central banks agree: “We do not foresee a totally cashless society”: ECB.

This has not been a good year for IT systems in the UK. First there was TSB Bank’s botched IT migration in April, which resulted in millions of customers being blocked from their online accounts. The problems at the bank continue to fester even to this day, 22 weeks later. Then there was the Visa outage in June, which caused chaos across much of Western Europe, but particularly in the UK where consumers are far more reliant on contactless Visa cards. And now there’s British Airways and Lloyds Banking Group.

On Thursday, British Airways announced that up to 380,000 card payments on both its website and app had been compromised during a 15-day data breach. BA says the breach affected bookings made between 10.58 pm on August 21 and 9.45 pm on September 5. The compromised data included the personal and financial details of the passengers that booked during that period.

BA says it was not a breach of the airline’s encryption. “There were other methods, very sophisticated efforts, by criminals in obtaining our data,” BA’s chief executive, Álex Cruz, said.

Some customers have complained of having to cancel cards as a result of the breach while others are considering changing their online passwords. BA launched a massive charm offensive assuring customers who lose out financially that they will be compensated. That didn’t stop the shares of BA’s Anglo-Spanish multinational holding company, International Consolidated Airlines Group, S.A., from falling 5% between Thursday and Friday.

And on Wednesday, Lloyds Banking Group reported that about 5% of transactions on card machines run by Cardnet, a joint venture between Lloyds Bank and First Data, were duplicated on 29 August. Most of the cards affected were Visa Debit cards, and thousands of British card holders had been charged twice.

This resulted in chaos for both cardholders and merchants. “My initial reaction was horror and then when I found out there was nothing Mercedes could do until the Monday – I felt lost,” said Francesca Brady, who was charged twice for an £18,000 second-hand Mercedes. She and her mother were left thousands of pounds overdrawn over the weekend until Mercedes reimbursed them.

Cardnet claims that all affected customers were refunded by Tuesday, September 4. But even if each duplicate charge is indeed refunded, there will still be a loss incurred by the merchants that have to waive each transaction fee due to the bug. Then there are the victims who fail to realize they’ve been overcharged because their blind reliance on convenient payment technologies has left them psychologically unaccustomed to keeping track of their spending.

This episode was the second major glitch affecting Visa cards this summer, but it’s unlikely to dim Visa’s determination to “put cash out of business” for its own profits. For companies like Visa and MasterCard, which provide the technical infrastructure for digital money transfers all over the world, cash is arguably their biggest competitor. It is also a huge barrier preventing credit card companies and IT-firms from collecting valuable personal and financial information on consumers and to monetize this data.

This is precisely why Visa, MasterCard and their allies are running huge global marketing campaigns to remind consumers how absurd and antiquated it is to pay with cash and how much more modern and convenient it is to make all your payments digitally. They even offer to bribe restaurants and retailers into refusing to accept cash, all in the name of “educat[ing] merchants and consumers alike on the effectiveness of going cashless.”

But each time a major glitch occurs, consumers and retailers are reminded of the risks of depending purely on digital payments, as well as one of the great benefits of physical cash: it is accepted just about everywhere and does not suddenly fail on you. Even the ECB recently warned that a wholly cashless economy would heightens the risk of IT failures, systemic hacking and rampant financial exclusion, as more vulnerable members of society would be unable to make payments.

“Increasingly, central banks insist that cash will also play a role. We do not foresee a totally cashless society,” said Ewald Nowotny, member of the ECB’s Governing Council, at a recent conference in Brussels. “If there is for instance an energy blackout, cash is the only surviving way of payment.”

Even in the UK’s “less cash” economy, people are beginning to sit up and pay attention, according to a survey by GoCompare Home Insurance: In the wake of the Visa outage in the summer, as well as the unending chaos at TSB, a quarter of the survey’s respondents said they now keep more cash in their house in case similar payment system failures happen again.

And the IT chaos continues at TSB Bank. Last Friday the lender scheduled a four-hour shutdown of the online platform so that it could carry out maintenance work, warning customers in advance. But then the system crashed in time-honored fashion, leaving many customers unable to access mobile, online or telephone services for the whole weekend.

As the problems drag, you’d think customers are leaving the bank in droves. But that’s not happening. Read… Why Are So Few Customers Leaving TSB Bank Despite 21 Weeks of Mayhem?