NAFCU letter in advance of tomorrow’s Senate Commerce Committee Data Security Hearing

March 25, 2014

The Honorable Jay Rockefeller
Committee on Commerce, Science &
United States Senate
Washington, D.C. 20510

The Honorable John Thune
Ranking Member
Committee on Commerce, Science &
United States Senate
Washington, D.C. 20510

Re: Protecting Personal Consumer Information from Cyber Attacks and Data Breaches 

Dear Chairman Rockefeller and Ranking Member Thune:

On behalf of the National Association of Federal Credit Unions (NAFCU), the only trade association exclusively representing our nation’s federal credit unions, I write in advance of tomorrow’s hearing, “Protecting Personal Consumer Information from Cyber Attacks and Data Breaches.” We appreciate the committee’s continued focus on this issue in the wake of a concerning string of merchant related data breaches including the massive Target breach resulting in over 110 million consumer records being compromised.

As the number of data breaches at U.S. retailers continues to climb, so does the emotional toll and financial burden on tens of millions of consumers across the country. The colossal scale of recent data breaches continues to demonstrate the necessity for Congressional action. Since the Target breach became public, we have seen a steady stream of other large data breaches making national headlines.

As you know, in recent testimony before Congress witnesses from both Target and Neiman Marcus admitted that they were not able to detect their own system breaches; Target was alerted by the Department of Justice and Neiman Marcus by their card processor. NAFCU believes this alarming fact should be further examined at tomorrow’s hearing as entities must be capable of protecting their own systems in order to protect consumers.

The recent Target breach has been especially onerous on credit unions. Our member credit unions report that, on average, they have received hundreds of inquiries from their members seeking assistance due to the recent Target breach. NAFCU estimates that this particular breach could end up costing the credit union community nearly $30 million. This cost comes from fraud monitoring, reissuance of cards and actual losses from this breach. It does not even count the intangible cost of the staff time needed to handle all of the member service issues that stem from the breach. Unfortunately, credit unions will likely never recoup much of this cost, as there is no statutory requirement on merchants to be accountable for costs associated with breaches that result on their end.

These numbers echo what has historically happened to credit unions when a major retailer data breach occurs. A recent survey of NAFCU-member credit unions found that the 2006 data breach at TJ Maxx stores led to a median cost of $32,000 per institution from the breach, with only about 10% of those costs ever recovered on average.

As we first wrote to Congress in February 2013, as part of NAFCU’s five-point plan on regulatory relief, these incidents must be addressed by lawmakers. Every time consumers choose to use plastic cards for payments at a register or make online payments from their accounts, they unwittingly put themselves at risk. Many are not aware that their financial and personal identities could be stolen or that fraudulent charges could appear on their accounts, in turn damaging their credit scores and reputations. Consumers trust that entities collecting this type of information will, at the very least, make a minimal effort to protect them from such risks.  Unfortunately, this is not always true.

Financial institutions, including credit unions, have been subject to standards on data security since the passage of the Gramm-Leach-Bliley Act. However, retailers and many other entities that handle sensitive personal financial data are not subject to these same standards, and they become victims of data breaches and data theft all too often. While these entities still get paid, financial institutions bear a significant burden as the issuers of payment cards used by millions of consumers. Credit unions suffer steep losses in re-establishing member safety after a data breach occurs. They are often forced to charge off fraud-related losses, many of which stem from a negligent entity’s failure to protect sensitive financial and personal information or the illegal maintenance of such information in their systems. Moreover, as many cases of identity theft have been attributed to data breaches, and as identity theft continues to rise, any entity that stores financial or personally identifiable information should be held to minimum standards for protecting such data.

NAFCU member credit unions recognize the legislation introduced by Chairman Rockefeller, the Data Security and Breach Notification Act of 2014 (S. 1976), as a comprehensive effort that has been critical in keeping the important conversation of data security moving forward in Congress. NAFCU looks forward to working with the bill’s sponsors to clarify and strengthen language pertaining to credit unions already subject to strict data security protections under the Gramm-Leach Bliley Act to ensure they are not subject to any new onerous or duplicative regulation under the proposed law.

The need for legislation to bring additional entities, including merchants, handling sensitive consumer into the federal regulatory rubric was unscored recently by estimates that one-third of the American public has been adversely impacted by the breaches disclosed over the last few months. While these breaches have drawn national attention, the reality is that data breaches are happening all the time, often on a smaller scale that does not make the nightly news.  When taken together, these smaller breaches impact just as many consumers. According to the Identity Theft Resource Center, there were more than 600 reported data breaches in 2013 – a 30 percent increase over 2012.  The business sector accounted for almost 82 percent of the breached records while the financial sector accounted for less than 2 percent of all breached records in 2013.

A recent Javelin Strategy & Research report (December 2013) found that financial institutions are doing a much better job than retailers when it comes to credit card security.  “Retailers, common targets for data breach crimes, scored the lowest in prevention and among the lowest overall,” said Al Pascual, the senior analyst who co-authored the report. Furthermore, according to the Verizon 2013 Data Breach Investigation Report, a breakdown of incidents across various industries actually resulting from network intrusions, the retail industry was far and away the number one target, with nearly 22 percent of network intrusions occurring at retailers.

While some argue for financial institutions to expedite the switch to “chip and PIN” technology, the reality is that it is no panacea for data security and preventing merchant data breaches. Many “chip and PIN” cards were compromised in the Target data breach because the terminals at the point of sale only accepted magnetic stripe technology. Additionally, “chip and PIN” technology does not protect against online fraud, as the technology is designed to hinder in-person fraud and card duplication. This is yet another fact highlighting the need for greater national data security standards as the way to truly help protect consumer financial information.

NAFCU continues to recommend that Congress make the following priorities in any legislation and act on the following issues related to data security:

  • Payment of Breach Costs by Breached Entities: NAFCU asks that credit union expenditures for breaches resulting from card use be reduced. A reasonable and equitable way of addressing this concern would be to require entities to be accountable for costs of data breaches that result on their end, especially when their own negligence is to blame.
  • National Standards for Safekeeping Information: It is critical that sensitive personal information be safeguarded at all stages of transmission. Under Gramm-Leach-Bliley,  credit unions and other financial institutions are required to meet certain criteria for safekeeping consumers’ personal information. Unfortunately, there is no comprehensive regulatory structure akin to      Gramm-Leach-Bliley that covers retailers, merchants and others who collect and hold sensitive information. NAFCU strongly supports the passage of legislation requiring any entity responsible for the storage of consumer data to meet standards similar to those imposed on financial institutions under the Gramm-Leach-Bliley Act.
  • Data Security Policy Disclosure: Many consumers are unaware of the risks they are exposed to when they provide their personal information. NAFCU believes this problem can be alleviated by simply requiring merchants to post their data security policies at the point of sale if they take sensitive  financial data. Such a disclosure requirement would come at little or no cost to the merchant but would provide an important benefit to the public at large.
  • Notification of the Account Servicer: The account servicer or owner is in the unique position of being able to monitor for suspicious activity and prevent fraudulent transactions before they occur. NAFCU believes that it would make sense to include entities such as financial institutions on the list of those to be informed of any compromised personally identifiable information when associated accounts are involved.
  • Disclosure of Breached Entity: NAFCU believes that consumers should have the right to know which business entities have been breached. We urge Congress to mandate the disclosure of identities of companies and merchants whose data systems have been violated so consumers are aware of the ones that place their personal information at risk.
  • Enforcement of Prohibition on Data Retention: NAFCU believes it is imperative to address the violation of existing agreements and law by merchants and retailers who retain payment card information electronically. Many entities do not respect this prohibition and store sensitive personal data in their systems, which can be breached easily in many cases.
  • Burden of Proof in Data Breach Cases: In line with the responsibility for making consumers  whole after they are harmed by a data breach, NAFCU believes that the evidentiary burden of proving a lack of fault should rest with the merchant or retailer who incurred the breach. These parties should have the duty to demonstrate that they took all necessary precautions to guard consumers’ personal information but sustained a violation nonetheless. The law is currently vague on this issue, and NAFCU asks that this burden of proof be clarified in statute.

On behalf of our nation’s credit unions and their 97 million members we thank you for your attention to this important matter. Again, we urge you to hold retailers to the same strict standards of data security and breach notification that financial institutions must adhere to. We look forward to working with your offices on existing legislation and new ideas as the legislative process takes shape. If my staff or I can be of assistance to you, or if you have any questions regarding this issue, please feel free to contact myself, or NAFCU’s Vice President of Legislative Affairs, Brad Thaler, at (703) 842-2204.


Carrie R. Hunt
Senior Vice President of Government Affairs/General Counsel

cc:        Members of the Committee on Commerce, Science & Transportation

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