The Target Test and the Financial System

target fraud

Despite the headlines and the perception that financial markets and the economy are returning to some semblance of normal and growth, this is far from the underlying reality. Beneath the headlines and the newest bubble trifecta in housing, bonds, and equity, the flip side paints a much grimmer picture where record debt, unemployment, as well as government intervention and transfer payments exist. In fact, the sheer enormity of intervention has created a tinder box of risk waiting for a spark. We may have just witnessed the original of one potential spark.

As most of you know, a week before the Christmas holiday, Target announced that computer hacking compromised some 40 million card users. The company later announced assurances that the compromise was contained, but news spread very quickly. Soon, the story made it to practically all major mainstream and local news outlets. Oddly, as time went on we learned that personal identification numbers or debit card PINs were also scraped in the hack. 

While the story was masterfully sequestered soon after its breach, the fact that it saw the light of day in such fashion might be considered news in and of itself.

Widespread Acknowledgement

Before considering more ominous outcomes, it is worth noting the speed by which this story was disseminated from the local to the international level - with echoes within the social media space.

It is true that the major media outlets are owned by a very small group of interests. However, the fact is that all it really took was one or two beleaguered local news stations deciding to make a name for themselves and their advertisers.

The Aftermath
 
Containment of the issue was fast. The appropriate word is indeed containment, as the fallout from this incident could have atomic-like repercussions.

There was a temporary period where customers reported being denied the option of using credit or debit cards for payment. Walgreens temporarily suspended these types of transactions. When a customer went in a store to pick up a prescription, the cashier could not accept his credit card for payment because they were taking precautions given the Target situation. Walgreens decided to review its vulnerability to cyber attack.

Is it not too much of a stretch to imagine other large retailers taking similar precautions in the name of consumer protection or liability? It seems fairly clear that Target will assume most of the liability.

The Bank Response

Or, what about the card issuer - mainly the banks which decide to take precaution against the threat of spreading fraud? The majority of financial transactions are supported by a narrow infrastructure with very limited redundancy. Indeed, we saw this develop when JP Morgan Chase put withdrawal and purchase limits on 10% of its customer’s debit cards.

Once the card issuer becomes involved with actions that include limits or forced safety features, the inevitable crossover into the world of bail-ins and deposit ownership concerns comes into focus. The fact is that these were debit card breeches and not credit card fraud, upon which blame could be placed on the laps of card processors. As such, this makes it more likely that we will see new security measures evolve soon.

The Unavoidable

Like much of the physical infrastructure in the western world, things are decaying. Complex systems evolved too far ahead and too quickly for the underlying apparatus to support it to evolve.

Financial transactions are much like power transmission, fuel and water distribution. Both domestic and international are not built on the appropriate redundancy that might protect it in case of collapse.

It is quite amazing that in one fell swoop, the electronic transaction mechanism could have been compromised. It is not too far a stretch to imagine another large retailer taking similar steps.

Many have long wondered when a banking holiday will eventually come. It was far too easy for me to see this scenario triggering the excuse to implement this possibility. 

The resulting chaos would emerge very quickly. Not so much because of bank runs. Sadly, the majority do not hold enough cash, resources, or the ability to feed themselves for much longer than a weekend. News and panic could spin out of control, further breaking the system and the limping economy underlying it.

The final judgment on this development remains to be seen. But when viewed through the prism of the world financial system’s incredible fragility (and the currency underlying it), it would make sense to continue preparing for the worst and hoping for the best.

(Family Survival Kit)
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