Small Businesses, Banks Wrestle With Security Issues

If online banking is a blessing for small and midsize businesses, then it could also be a security curse, according to a study published earlier this week.

According to a study conducted by Ponemon Institute and sponsored by Guardian Analytics, SMBs are becoming increasingly frustrated by breaches that occur through the banking system, as well as the banks' inability to detect or rectify them.

In the survey, 55 percent of SMBs reported experiencing fraud in the past 12 months, with 58 percent of fraud enabled by online banking activities. Eighty percent of banks failed to catch fraud before funds were transferred out of their institutions, Ponemon says.

While many small businesses assume banks will restore funds lost in online hacks, the survey paints a different picture. In 87 percent of fraud attacks, the bank was unable to fully recover the lost assets, Ponemon says. Fifty-seven percent of the respondents that have experienced a fraud attack said they were not fully compensated by their banks. Twenty-six percent were not compensated for any part of their losses.

Terry Austin, CEO of Guardian Analytics, says he was surprised by the high volume of SMBs that reported experiencing fraud and by the lack of detection of fraud by the banks.

"We consider that a best practice, and it's not being followed," he says.

The incidence of fraud is affecting the relationship between the banks and their customers, according to the study. Forty percent of SMBs said they moved their banking activities elsewhere after a fraud incident.

Eleven percent of SMBs that have experienced fraud claimed they have terminated their banking relationship following fraud attacks, and an additional 29 percent said they did not fully terminate their relationship, but moved their primary cash management services to another institution.

Such incidents could not only cause a loss of business for the banks, but they also can incur legal costs, Austin observes. He pointed to recent lawsuits in which companies sued their banks for failing to provide compensation, or banks that sued customers for failing to take proper steps to secure their transactions.

"There are no standards for banking customers security as there are for credit-card handlers under PCI," Austin observes. "The [security] roles of the two sides are not well-defined."

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