Cell Phone Companies and Security

This is a fascinating story of cell phone fraud, security, economics, and externalities. Its moral is obvious, and demonstrates how economic considerations drive security decisions.

Susan Drummond was a customer of Rogers Wireless, a large Canadaian cell phone company. Her phone was cloned while she was on vacation, and she got a $12,237.60 phone bill (her typical bill was $75). Rogers maintains that there is nothing to be done, and that Drummond has to pay.

Like all cell phone companies, Rogers has automatic fraud detection systems that detect this kind of abnormal cell phone usage. They don’t turn the cell phones off, though, because they don’t want to annoy their customers.

Ms. Hopper [a manager in Roger’s security department] said terrorist groups had identified senior cellphone company officers as perfect targets, since the company was loath to shut off their phones for reasons that included inconvenience to busy executives and, of course, the public-relations debacle that would take place if word got out.

As long as Rogers can get others to pay for the fraud, this makes perfect sense. Shutting off a phone based on an automatic fraud-detection system costs the phone company in two ways: people inconvenienced by false alarms, and bad press. But the major cost of not shutting off a phone remains an externality: the customer pays for it.

In fact, there seems be some evidence that Rogers decides whether or not to shut off a suspecious phone based on the customer’s ability to pay:

Ms. Innes [a vice-president with Rogers Communications] said that Rogers has a policy of contacting consumers if fraud is suspected. In some cases, she admitted, phones are shut off automatically, but refused to say what criteria were used. (Ms. Drummond and Mr. Gefen believe that the company bases the decision on a customer’s creditworthiness. “If you have the financial history, they let the meter run,” Ms. Drummond said.) Ms. Drummond noted that she has a salary of more than $100,000, and a sterling credit history. “They knew something was wrong, but they thought they could get the money out of me. It’s ridiculous.”

Makes sense from Rogers’ point of view. High-paying customers are 1) more likely to pay, and 2) more damaging if pissed off in a false alarm. Again, economic considerations trump security.

Rogers is defending itself in court, and shows no signs of backing down:

In court filings, the company has made it clear that it intends to hold Ms. Drummond responsible for the calls made on her phone. “. . . the plaintiff is responsible for all calls made on her phone prior to the date of notification that her phone was stolen,” the company says. “The Plaintiff’s failure to mitigate deprived the Defendant of the opportunity to take any action to stop fraudulent calls prior to the 28th of August 2005.”

The solution here is obvious: Rogers should not be able to charge its customers for telephone calls they did not make. Ms. Drummond’s phone was cloned; there is no possible way she could notify Rogers of this before she saw calls she did not make on her bill. She is also completely powerless to affect the anti-cloning security in the Rogers phone system. To make her liable for the fraud is to ensure that the problem never gets fixed.

Rogers is the only party in a position to do something about the problem. The company can, and according to the article has, implemented automatic fraud-detection software.

Rogers customers will pay for the fraud in any case. If they are responsible for the loss, either they’ll take their chances and pay a lot only if they are the victims, or there’ll be some insurance scheme that spreads the cost over the entire customer base. If Rogers is responsible for the loss, then the customers will pay in the form of slightly higher prices. But only if Rogers is responsible for the loss will they implement security countermeasures to limit fraud.

And if they do that, everyone benefits.

There is a Slashdot thread on the topic.

Posted on December 19, 2005 at 1:10 PM • 57 Comments