Wendy's Could Become Test Case For New EMV Liability Rules

If fast-food chain Wendy’s has suffered a data breach as reports this week suggest, the company could become a test case of how liability for such incidents is assessed in the midst of the ongoing migration of the US payments industry to the EMV smartcard standard.

Earlier this week, KrebsOnSecurity reported receiving information from banking sources about fraudulent activity involving credit and debit cards used recently at multiple Wendy’s locations. KrebsOnSecurity said that most of the initial reports were originally from financial institutions in the Midwest, but later banks on the East Coast began reporting similar fraudulent activity as well.

Wendy's spokesman Bob Bertini told Dark Reading that the company is currently investigating reports of unusual activity involving payment cards used at some of its locations. “We have been working with our payment industry contacts since recently learning of these reports and we have launched a comprehensive investigation with the help of cybersecurity experts to gather facts, while working to protect our customers,” he said in emailed comments.

Bertini said it is hard to know for sure what the scope of the incident might be given the ongoing nature of the investigation. “As always, in line with prudent personal financial management, we encourage our customers to be diligent in watching for unauthorized charges on their payment cards.”

Brian Engle, executive director of the Retail Cyber Intelligence Sharing Center (R-CISC) says such incidents affected retailers put the whole industry on alert.

“[There are] a couple of significant reasons for this,” he says. “How did the attack actually occur? Everyone is trying to learn if there’s a new form of malware, or if there’s been a [new variant]," he says. Depending on the number of cards affected, there also could be a “ripple effect” across the retail industry, he says.

And if the incident at Wendy's is a confirmed data breach, it could also test new breach liability rules that went into effect across the US payments industry last October.

MasterCard, Visa, American Express and the other major credit card companies had wanted US merchants—with certain exceptions—to move their payment systems from magnetic stripe technology to the new EMV standard by October 31 of last year. Merchants that are not EMV- compliant after that data face a higher liability risk if they are not compliant and suffer a data breach.

EMV, which is short for Europay MasterCard Visa, is the current standard on which hundreds of millions of smartcards that are in use around the world are based. EMV smartcards store card data in a small microprocessor embedded in the card rather than in a magnetic stripe. The cards are considered much harder to clone than magnetic stripe cards, and have been a standard in many countries for over a decade.

Basically, new EMV smartcards issued in the US will continue to work on old magnetic stripe-based point of sale systems for some time, even though the October deadline has passed. But if a smartcard that is swiped at an old POS system gets compromised, it is the merchant that will be held responsible for costs associated with recalling and reissuing new cards.

Similarly, if a card that ends up getting compromised is not EMV-capable, the issuing bank will bear the costs of replacing the card.

There are all sorts of caveats and conditions in between around how liability will be assessed. The sheer complexity of the payment chain will make that task even harder especially because many organizations are still only in the process of cutting over to EMV.

“If it turns out there was a breach and that Wendy’s had not fully deployed EMV, this will likely be the first time the post-EMV liability shift financial reimbursement processes will play out on a large scale,” says Jim Huguelet, principal managing partner at the Huguelet Group LLC, a consulting firm that specializes in retail security. Assuming that not all Wendy’s stores were EMV-ready, the liability would need to be assessed on a site-by-site, card-by-card basis, he says.

Wendy's spokesman Bertini did not respond to questions about the food chain's EMV status, so it is not clear if the company has migrated to the new technology, is in the process of doing so, or has yet to begin.

If Wendy's indeed was breached, it would be somewhat ironic considering some of the comments the company’s vice president and treasurer Gavin Waugh made at a conference three year ago when discussing the fast food chain’s stance on the need to migrate to EMV.

“Our actual fraud rate is so small it’s hardly worth mentioning,” Digital Transactions had quoted Waugh, who was then vice treasurer, as saying.  “[EMV] doesn’t move the needle that much. Even if we pay the fraud liability, it’s a whole lot cheaper than putting in [EMV] terminals,” Waugh reportedly said.

--Kelly Jackson Higgins contributed to this report.