Samsung Pay's MST Transactions and Merchant's Ability to Detect “Cloned” Magstripe Tracks

I have a weird obsession with payment systems. They fascinate me. I find it very satisfying to make a credit card transaction and to get a text message confirming the purchase on my phone a second afterwards. As someone obsessed with networks, scalability and user experience I find this a very interesting field even though it's embedded in probably the least agile and most regulated industry. But not just the technology is interesting, also the fraud aspect is. Fraud prevention is an equally interesting topic to ponder about.

What makes frauds in payments so interesting is that there are many different payment protocols that exist throughout the world and your credit card is valid with almost all of them. The fraud vectors are huge and very often the only thing that keeps fraud rates down is a random spot checks and common sense.

The reason my interest got piqued again recently was Samsung Pay, particularly the MST part. MST, if you are not familiar with it, stands for magnetic secure transmission. The idea is that the phone emits a magnetic field that carries the information of track 2 on a credit card (at least in principle). What this means is that you can go to a lot of magstrip readers, hold your phone to it, and the reader thinks the card was swiped. (Assuming there are no other checks that a card is in a slot)

From a fraud perspective this seems crazy. You scan someone's credit card, duplicate it onto your phone and off you go. Here are the results of my investigation about how this is supposed to be used securely.

But for this we need to cover some ground.

A Bit of History If we don't go too far back, the earliest forms of standardized credit card processing were based on a credit card number. The credit card number in itself is split into two parts. The first six digits are the IIN or Issuer Identification Number. It identifies the network of the card (MasterCard, AMEX, Visa, etc.) and might identify the bank within that network. The rest (the remaining 10-13 digits) are the PAN or Primary Account Number. IIN + PAN + expiration date + name of cardholder are the basic requirements for making a credit card transaction. However as you can guess, since all that information is on the card there is very little that actually protects a payment. That's why on most of those transactions done that way they will also ask for the signature of the cardholder. That signature really only plays a role if the transaction gets disputed.

The Magstripe What makes credit cards convenient for in-store purchases is that you do not need to write down numbers, instead you can "swipe" the card. At least you do that in the US ;) When you swipe the card, the reader reads the two tracks on the magstripe. They are almost the same with a different data density. Both tracks contain: IIN + PAN, country code, expiration date and a field for discretionary data. It also contains the service code. The service code tells the terminal how the card wants to be confirmed (does it work internationally, does it need online verification, does it need a pin, AM only etc.) Track 1 which has higher density also contains the card holder name and has a bit of extra space for the discretionary data. So if you swipe the card, you have pretty much all the info that's written on it. What's in the discretionary data we will cover later.

Transaction Types and Security Codes An important tool for understanding fraud and to combat it is to split the one huge problem of credit card fraud into smaller sub-problems. In particular the most important split is "card present" or "card not present" (CNP) which should indicate if the physical card was present at the origin of the transaction or not. So how do you do that if the data is the same? The earliest form of trying to combat this was the addition of two security codes. They have various different names (CVC, CVV, CID) and on most cards it comes in two flavors: code 1 and code 2. One is stored in the magstripe in the discretionary data field, the other is printed on the back of the card. The idea is that you can differentiate between transactions carrying no security code, or CVC1 or CVC2. If someone skimmed your card through a magstripe reader, they can get to all data with the exception of CVC2. If someone takes your card number via phone they won't get your CVC1. At this point you can already see that there are different types of transactions with different fraud parameters. If someone does not use a CVC code it does not mean that the transaction will be declined outright, but it indicates that something is fishy.

EMV EMV is the answer for all problems and has been for a long time. The reason it plays little role here is because EMV in itself is secure (bad chip implementations notwithstanding). However EMV is still not rolled out in the US and as such, there is a huge market where magstripe is still something people need to deal with. Also EMV without NFC support cannot support MST which is the topic of discussion here. We will come back to that later however.

Modern Transaction Types What should be clear now is that there are many different ways to make a credit card transaction. But what is that actual transaction? At one point you want your money. If you get your money or not as a merchant depends on if the transaction was fraudulent or not, and if it was, if you had a chance to detect the fraud yourself. At one point you need to actually try to charge the issuer of the card as a merchant. Ideally you do it as quickly as possible. If you do it at the time you swipe the card, you might directly go online and check with the card issuer if everything is in order. This happens in most terminals now where the terminal directly talks to the bank to record the transaction. A more evolved version of this method is to replace the magstripe with a EMV chip. That chip can a challenge/response game with the payment terminal which means that each purchase is unique and skimming the data off the chip will not be any good for future transactions. That again will only work for transactions that actually use the EMV chip. If you just steal the magstripe and go to the US where all readers are magstripe, this will do absolutely nothing to you. Likewise for online payments many issuing banks will use 3D Secure for payment verification. The idea is that the online form for your credit card number also presents you an iframe with an extra input form by the bank. This allows a second factor to confirm the payment. For instance on my Austrian Erste Mastercard the second factor is a confirmation with a transaction code. The transaction will be declined unless I confirm the payment in the iframe with a unique token sent to my phone via SMS.

Tokenization: Apple Pay / Samsung Pay In an ideal world the magstripe would no longer exist and all terminals would use the EMV chip and online transactions would require 3D secure. However that's clearly not happening because the US seem to take bloody ages to replace their infrastructure. And not just the US. The idea to force everybody to newer and in this case kinda incompatible technologies did not work for many years, so an alternative has to appear. One alternative is what's often called "Tokenization" and oddly enough, it works by replacing the customer equipment rather then the merchant one. Instead of making all merchants upgrade their terminals to support EMV, you instead upgrade the customer's credit card to a phone. To understand why that's necessary you need to understand that NFC is not always NFC and in case of Samsung it might not even involve an actual RFID chip at all. In Europe when you use NFC for a payment the card transmits a response to a challenge like an EMV chip is. The transaction gets confirmed safely either directly by the card or in combination with the user's PIN. In either case the transaction gets confirmed through the issuer. In the United States however EMV often does not exist, so NFC has an alternative method where it transmits the MSD (magnet stripe data) instead. Apple Pay can do that similar to how Samsung Pay can transmit the very same data via magnetic pulses or NFC. So how does that make anything any more secure? Because of tokenization. Remember how the credit card number is split into IIN and PAN and how the magstripe contains this extra discretionary data. The idea is that assuming the terminal is connected to the internet and verifies transactions with the issuing bank the phone can play a little trick. The bank provides the phone with a method to "clone" the card securely onto the phone. At this point the phone acts as a hardware token generator. Whenever it confirms a transaction it replaces the PAN with a uniquely generated one and places some extra data in the discretionary data part. Both of that information gets transmitted to the issuing bank or TSP (token service provider, so MasterCard or Visa) where the token PAN (DPAN) gets replaced for the real PAN. The actual flow is a bit more complex than that, but in the end the transaction goes through like before.

The Merchant and Tokenization The important part here however is the merchant and this is where things get tricky. With Apple Pay the transaction is always done through a form of NFC. Either NFC with MSD or proper EMV NFC. It means that the merchant explicitly agrees with this form of payment and will introduce the system to the employees that accept the transactions. To confirm such a payment as a merchant you just make sure that the transaction is made from an iphone and everything else "should be secure". The only case of fraud is if someone managed to get a card on their phone which they were not entitled too, but that's the bank's problem because they should make that flow secure. The situation however is different with Samsung Pay and the reason for that is MST. As Samsung Pay works with non NFC POS terminals the question is how a merchant can differ a phone that uses Tokenization properly or a fraudulent phone that just relays the magstripe tracks from a stolen card. In fact, the merchant can't really do anything there because the transaction is as far as I know indistinguishable from what is shown on the terminal. The only party that could reliably block the transaction is the issuer or TSP. This interestingly enough can be solved by supporting EMV :) A modern card (one that would be used with Samsung Pay) could come with magstripe and EMV and the magstripe could indicate that the card prefers the chip over swiping. In this case you could still clone the magstripe into your phone, but the transaction would be declined if it used neither tokenization nor the chip. For this to work however, all merchants need to support EMV which currently is not the case in the US.

The Non EMV Apocalypse of 2015 Something interesting is going to happen end of October 2015. The US will finally start to force merchants to upgrade to terminals that support EMV. From that point onwards any card that has an EMV chip, but the chip was not used for the transaction and that transaction was fraudulent will become the merchant's problem. Assuming Samsung Pay becomes widespread it could make this liability shift a bit more painful because as a merchant you can not tell a good Samsung phone from a bad Samsung phone, whereas you could probably tell an original credit card with embossed numbers from a fake card with mismatching numbers and making your own embossed cards with all the cards you skimmed is a lot more work than to clone a card into a phone. So maybe EMV will become a bigger thing as a result of Samsung Pay even if the technology in itself has some potential for magstripe abuse.

Death of MSD Interestingly enough the roll-out of EMV in the US might have some bad aspects for European travellers and others. Our cards have a very different fraud profile than American ones because domestic transactions are done via EMV for nearly thirty nears now, with the liability shift having happened more than 10 years ago. In Europe cards prefer chip and pin for terminals and NFC is only supported for EMV transactions. The US terminals might use the MSD data for NFC however. So as a European customer you might see an NFC logo somewhere, but because it uses NFC MSD your European bank will decline the transaction because they only allow EMV based NFC. This is to be seen however, right now NFC terminals in the US are still not very widespread and the liability shift did not happen yet.