Banks 'wasting millions' on two-factor authentication

New threats need new response

By John Leyden, 15th March 2005

Banks are spending millions on two-factor authentication for their customers but the approach no longer provides adequate protection against fraud or identity theft, according to Bruce Schneier, the encryption guru.

"Two-factor authentication was invented a couple of decades ago against the threats of the time. Now, the threats have changed - and two-factor authentication doesn't defend against them. It's a waste of money," Schneier told El Reg. His comments are controversial because they attack a technology touted as a gold standard for net security - but that doesn't necessarily mean he's wrong.

In an essay in the April issue of Communications of the ACM - published 15 March - Schneier notes that two-factor authentication tokens have been around for nearly 20 years, but are only just receiving mass-market attention with AOL and some banks issuing them to customers. Passwords alone do not provide adequate security, everyone now acknowledges. Supplementing passwords with hardware tokens, which dynamically generate authentication key codes that change every minute, guards against eavesdropping and offline password guessing (types of passive attack). All well and good but this approach fails to protect against modern active attack techniques such as man-in-the-middle attacks or Trojans, according to Schneier.

Too Little, Too Late

In a man-in-the-middle attack, an attacker puts up a fake bank web site and entices a user to that site. The user types in his password, and the attacker uses this data to access the bank's real site. An attacker could pass along a user's banking transactions while making his own transactions at the same time. "Done correctly, the user will never realize that he isn't at the bank's web site," Schneier writes. In a Trojan scenario, an attacker would be able to piggyback on a user's session whenever he logs into his bank's website and make any fraudulent transactions he wants.

Schneier argues two factor authentication fails to protect against either of these scenarios. "In the first case [man-in-the middle], the attacker can pass the ever-changing part of the password to the bank along with the never-changing part. And in the second case, the attacker is relying on the user to log in," he writes. "The real threat is fraud due to impersonation, and the tactics of impersonation will change in response to the defences. Two-factor authentication will force criminals to modify their tactics, that's all."

Early adopters of the technology may enjoy a significant drop in fraud, as crooks move onto easier targets, acknowledges Schneier. But he predicts that the approach is ultimately doomed. Despite his criticisms, he reckons two factor authentication still has a role in enterprise security. "It works for local log-in, and it works within some corporate networks. But it won't work for remote authentication over the Internet," he concludes. ®