Why e-Tailers Doing Away with SMS OTP is a Big Risk

With the Reserve Bank of India (RBI) recently placing the responsibility of customer verification squarely on the shoulders of e-commerce merchants, the industry is witnessing a shift in security practices.

As e-tailers adopt new methods for user authentication, some are moving away from SMS OTP (One-Time Password) verification, opting for alternative, streamlined options.

While these new methods may seem customer-friendly, this change introduces significant risks—especially in terms of data security and fraud.

In this article, we’ll break down the key reasons why removing SMS OTP from the verification process could compromise user security and expose merchants to potential fraud, ultimately impacting customer trust and compliance with regulatory standards.

Understanding 2-Factor Authentication and Its Core Principles

Two-factor authentication (2FA) serves as an additional layer of security to ensure that users’ identities are properly verified. According to industry standards and regulatory guidelines, effective 2FA should adhere to these principles:

1. Independence of Verification: The verification system should be fully independent, meaning that one party cannot serve as both the verifier and the verified source.

2. Transaction-Level Authentication: Each transaction should be individually authenticated, ideally through an external system.

3. Ease of Use: The method should be simple enough for users to understand and utilize effectively.

SMS OTP has traditionally served as an effective 2FA method, checking all three of these boxes.

However, some major e-commerce players are now experimenting with alternatives that prioritize convenience, sometimes at the expense of security.

The Security Risks of Moving Away from SMS OTP

While many of these new authentication methods appear easy and efficient, they come with notable risks:

1. Lack of Independence in Verification

Using an internal or embedded verification system compromises the security principle of independence. When merchants rely on in-app authentication or stored data, they risk acting as both judge and jury.

This lack of separation increases the potential for manipulation or breaches.

2. Dependency on Stored Information

Many of these new methods authenticate users based on stored information, like previous login data or device identifiers. This approach leaves users vulnerable to attacks if their stored data becomes accessible to unauthorized parties.

In contrast, SMS OTP generates a new code for each transaction, reducing risks by requiring fresh authentication each time.

3. Insecure API Transactions

With authentication methods that are reliant on API calls, sensitive user data may be shared across various endpoints that lack adequate security protections. This creates a significant opportunity for hackers to intercept data and compromise user privacy.

While some larger players may secure their systems, the endpoints where transactions occur are not always fully protected.

4. Increased Possibility of Fraud

When verification becomes simplified to stored information or internal systems, it’s easier for fraudsters to bypass these checks, especially through techniques like social engineering or malware attacks.

SMS OTP, however, provides a distinct, independently generated code, creating a more robust barrier against unauthorized access.

Why SMS OTP Remains a Reliable, Secure Choice

SMS OTP offers a trusted, global solution for 2FA, addressing key security and usability concerns:

Independent Verification: SMS OTP relies on the telecommunications network, making it an independent source for authentication and reducing the risk of internal manipulation.

Wide Adoption: Used worldwide, SMS OTP is an established verification method that customers recognize and trust, providing peace of mind during transactions.

Security and Compliance: With stringent data protection regulations like GDPR, safeguarding user information is paramount. SMS OTP aligns well with these regulations as it doesn’t expose sensitive data to multiple endpoints.

While SMS OTP may seem like an older technology, it remains one of the most secure and widely accepted methods for verifying users and validating transactions, especially as cybersecurity threats continue to evolve.

Long-Term Implications for E-Commerce Security

The shift away from SMS OTP could have far-reaching consequences for e-commerce businesses:

Increased Exposure to Data Breaches

Stored information authentication methods may inadvertently expose sensitive data to cyberattacks, leading to a rise in data breaches.

Compliance Risks

As global data protection regulations become more stringent, SMS OTP offers a simpler path to compliance by limiting data exposure to external systems.

Loss of Customer Trust

Customers expect businesses to take every possible measure to protect their data. Removing trusted authentication methods like SMS OTP can reduce customer confidence and loyalty.

Conclusion

While alternative authentication methods may offer a degree of convenience, SMS OTP remains a secure, dependable choice for protecting user accounts and verifying transactions.

As the e-commerce industry grapples with ever-evolving security challenges, businesses should carefully consider the potential risks of moving away from SMS OTP.

By keeping SMS OTP as a part of their authentication toolkit, e-tailers can better safeguard customer data, maintain compliance, and foster trust in an increasingly security-conscious market.