Monday, November 26, 2007

Phishing is not an "externality"

I'm no security expert, not even close (I just read about it), while Bruce Schneier is really world renowned security expert. I'm an avid reader of his monthly newsletter and, far more importantly, Neil Stephenson thanked him in Cryptonomicon which is ummmm... words fail me but let's say awesome. However there is one particular hypothesis of Bruce Schneier that I never bought into, not even a little bit; the "our customers are victims of phishing but it isn't affecting us" hypothesis of phishing as externality. In this article (and several other places) he claimed that "Financial institutions have no incentive to reduce those costs of identity theft because they don't bear them." Again, I'm no security expert but I never agreed with that sentiment; it seems obvious to me that customers leaving financial institutions for phishing problems is a direct cost even if financial institutions are unaware of it or are ignoring it (it's an entirely different problem if that's the case.)

This new study indicates that financial institutions do indeed bear costs of phishing and what's more, phishing seems to affect them at their core: by jeopardizing trust people have in their brands. I don't know how many times I have bought an item from even if it is more expensive just to avoid giving my data to an unknown merchant. That's the power of brand. If the study is correct (and it does need to be confirmed by more studies) then I think "phishing is externality" hypothesis can be safely rejected (most importantly by companies that adhere to it through ignorance or bad managment.)

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