Data breaches can ‘ drive consumers back to using cash’
RBC warning cites a number of studies
The recent massive data breach at Equifax Inc. has one bank warning that such incidents have the potential to turn consumers off digital payments, thereby hindering the transition to a “cashless society.”
“We believe large- scale data breaches/ fraud ( such as the Equifax breach) can slow the pace of innovation and drive consumers back to using cash for payments,” wrote RBC Capital Markets analyst Daniel Perlin on Monday. “In terms of the payment companies we follow, we do not expect any significant direct exposure but, clearly given the size of the breach, cardholder info has been exposed and cards will be re- issued; therefore, we believe possible ‘air pockets’ in spending could be created, but should be short-lived.”
RBC said last week that “a small number” of its credit card clients may have had t heir personal i nformation affected by the Equifax breach, The Canadian Press reported.
Equifax, one of the world’s l argest credit- r eporting agencies, disclosed earlier this month it had been hacked and that the personal information of approximately 143 million Americans and 100,000 Canadians had been exposed — numbers that rank the data breach as one of the largest in history, according to RBC.
The situation has taken a hefty bite out of Equifax’s share price, driving it down about 25 per cent. Meanwhile, chief executive Richard Smith stepped down Tuesday, about a week before he was scheduled to face questioning from the U. S. Congress.
RBC cited a number of studies to back up their belief that data breaches can l ead consumers back to cash, such as a Federal Reserve Bank of Boston study that found “the percentage of consumers considering credit and debit cards as ‘secure’ declined significantly,” following a 2013 cyber attack on Target Corp.
“On the other hand, rati ngs of cash relative to all payment methods increased,” added Perlin.
A January 2017, study by Gemalto, Perlin said, found a majority of consumers steered clear of retailers, banks and social media sites if they had been breached. A 2016 study by Thales discovered 88 per cent of Americans would stop using digital payments “if they personally fell victim to cybercriminal activity.”
“In fact, 65 per cent of shoppers are wary of having their personal information being hacked using their mobile/smartphone, according to a PwC 2017 retail survey,” said the RBC note. “Therefore, any increased concern among consumers following a breach would drive con- sumers away from mobile and online channels, in our estimation.”
There could be broader “brand” effects felt as well. A recent report on data breaches from U.S. market research firm Forrester warned of “brand recovery costs” a company may incur in order to regain the trust of customers.
“For example, retailers, restaurants, and hotels may see greater fluctuations as consumers can more easily take their business elsewhere,” it said. “Developing a strategy for an event that undermines credibility or trustworthiness of a brand is more difficult and costs more than a short- term engagement to contain an issue (e.g., product recall).”
A Sept. 14 report from Morgan Stanley on Equifax said that investors had been concerned about heightened regulations for the industry. “This could result in higher compliance costs at best, or nationalization of the credit bureau function at worst,” said the note.
Yet spooked consumers may also be limited in what they can do.
“We are all moving toward a cashless society,” said Bob Hudyma, associate professor at Ryerson University’s Ted Rogers School of Information Technology Management, in an interview.
“Even if I wanted to, I would have to take extreme measures to go off the grid, and that’s really not practical for any of us that want to live in any kind of a city,” said Hudyma. “The answer is you’ve got no choice.”
However, Hudyma noted there were reports Wednesday of a breach of store payment systems at drive- in burger chain Sonic Corp., and that this was seemingly becoming a “weekly” phenomenon.
RBC also cited the 2017 study of U.S. consumers done by ATM operator Cardtronics Inc., which found that cash remains the “most commonly used form of payment by a comfortable margin,” even as its usage declined by four per cent from 2016 to this year.
Meanwhile, debit card usage fell eight per cent year over year, credit card usage was flat, and digital payments climbed 16 per cent. However, cash remained the preferred payment method for 27 per cent of consumers, and 29 per cent of millennials. Debit cards were the only payment method more popular than cash, with 33 per cent of consumers preferring it.
“And when the choice of ‘ how to pay’ hinges on safety, security and privacy, cash clearly separates from the payments pack — most notably on privacy ( e. g. doesn’t track purchase behaviour) — a benefit that cashless cannot deliver,” said the study.
ON SAFETY, SECURITY AND PRIVACY, CASH ... SEPARATES FROM PACK.