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?

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  1. Disturbed Voter

    National intelligence entities need that data. That is what is necessary to cross-correlate and enhance the meta-data they have already gathered. So how can you tell the difference between a national intelligence entity and criminals? I can’t.

    Of course regular criminals are motivated for different reasons.

  2. kk

    One of these days something serious will happen with a computer system and we’ll go back to real journals and ledgers. When l started work we kept books on paper and l marvelled to see entries that had been made by some clerk in the 1930’s still as clear as ever.

  3. M&Ms

    Most of the cards affected were Visa Debit cards, and thousands of British card holders had been charged twice.

    All of these IT stuff ups are worth bearing in mind the next time you hear some bank or credit card CEO scoffing at blockchain.

    1. Yves Smith

      Right, which also run on IT systems provided by smaller players subject to less regulation. Pretty much everyone keeps their crypto in a third party wallet for secrecy and greater ease of transacting (and it still isn’t easy).

      So why should they be assumed to be any more reliable?

      1. M&Ms

        More reliable because blockchain is a giant distributed database, containing thousands of nodes all over the world. It solves the double-spending problem, which as this article makes clear, VISA has not (and probably won’t).

        To be specific about reliability, guess how many data centers VISA has in the whole world?

        Would you believe only two, both in the US?

        They are working to open two more, one in the UK, and one in Singapore. By comparison, Bitcoin has 9000+ redundant nodes, some of which are even in orbit over the earth. In terms of redundancy and from a technical standpoint, then, blockchain is already ahead of many banking systems.

        The issue of regulation concerns exchanges, not blockchain, and it is true there are issues, as they are not regulated. Exchanges can “simulate” *cough* market activity, and they can be hacked. But the better exchanges use much better security like 2FA. The exchanges that have been hacked usually had shoddy security, like Coincheck in Japan. Better security is known tech. More interestingly, there is now work being done on distributed exchanges, which will resolve many of the transparency issues.

        Lastly, third party wallets are about protecting your keys, and keeping your assets off of an exchange, which is the weakest link in the whole ecosystem. It’s not an issue of reliability, but rather security and convenience. You could write your blockchain keys out on a piece of paper and if the exchange you use burned down in a fire tomorrow your crypto would still but good. A piece of paper could get lost, though, so people tend to use USB keys.

  4. Synoia

    To err is human
    To really mess up requires a computer


    Computers do not make mistakes,
    they repeat yours over and over and over again.

  5. Synoia

    their blind reliance on convenient payment technologies has left them psychologically unaccustomed to keeping track of their spending.

    Very well said. When traveling the London Underground I used to kee track of the fees and costs, and compare it to walking or the Bus. It is very easy to walk a few tube of bus stops in central London, and about as fast as taking public transport.

    With he contactless system, I now have no clue as to the charges.

  6. RBHoughton

    I am glad the ECB recognises there are uses for cash. The particular fear I have since the Cyprus financial imbroglio is that banks will ‘bail-in’ customers’ savings when they next go bankrupt. I have no expectations of the political classes preventing or limiting that.

  7. Jean

    Credit cards used at corporate outlets. Never a penny spent on fees or interest.
    Autopay from bank, not even the cost of stamp.

    Cash used at locally and family owned businesses.
    That’s the hard and fast rule in our family.

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