Heartland moves to encrypted payment system

The transaction processing company is installing end-to-end encryption

Responding to its widely reported and massive data breach that took place a year ago, Heartland Payment Systems will be moving to an end-to-end encryption system for payment transactions, according to Chairman and CEO Robert Carr.

"End-to-end encryption is a good way to mitigate the risk of having the kind of compromise that we and hundreds of other companies have had," Carr said in an interview.

"We're using encryption on the front end to keep card numbers out of our merchants' systems, and to also have all the card numbers coming through our network be encrypted throughout, except at the point of decryption," he said.

The company, which handles more than 4 billion transactions annually for more than 250,000 merchants, will be using Thales nShield Connect hardware security module along with Voltage Security's SecureData encryption software as the basis of this capability.

In January 2009, Heartland Payment Systems reported that it found that intruders had penetrated its systems and planted software to harvest card numbers, using SQL injection attacks to plant programs inside the network that would sniff the card numbers.

In August, the U.S. Department of Justice indicted Florida resident Albert Gonzalez for this breach, along with those of several other companies that were attacked. Gonzalez pleaded guilty last month.

The 2009 attack on Heartland actually stemmed from an earlier breach that occurred in May 2008, Carr explained. "We thought we did everything possible to clean it up," he said. It turned out, however, some of Gonzalez's malware went unnoticed.

On Jan. 12, 2009, Heartland was alerted of unusual activity stemming from the card numbers in the company's system. Over the rest of that week and into the weekend, the company located the malicious software, and consulted with law enforcement and the credit card companies. Heartland announced the breach the following Tuesday, Jan. 20.

Subsequently, the company was criticized for announcing the breach during the inauguration of U.S. President Barack Obama, which dominated media coverage that day. Carr explained, however, that the announcement had to be made before the U.S. stock markets opened — the previous day was a U.S. holiday — in order to avoid the appearance of insider trading among any of the affected companies, should their stock prices be swayed by the news.

Although the DOJ reported that Gonzalez and his cohorts had gathered as many as 130 million credit card numbers, Carr would not specify how many card numbers were copied from his system alone.

"Nobody really knows the right number and we're not privy to all the data that exists," he said. "We believe the number is less [than media accounts], but we're not arguing it was an insignificant breach."

Like most companies, Heartland encrypted its databases of card numbers, responding to 2003 California legislation that required organizations to publicly disclose data breaches. If the leaked information was encrypted, then disclosure may not be necessary. In Heartland's case, however, the card numbers were decrypted for use in other applications, allowing them to be read in transit or while being processed by other applications.

In order to stem another attack of this sort, Heartland looked at a number of security architectures before choosing end-to-end encryption, Carr said.

With this new system, Heartland will offer merchants the capability to encrypt cards so the merchant themselves will not house the card numbers on their systems at all, explained Terrence Spies, the chief technology officer for Voltage Security. Most merchant payment-processing systems encrypt the PIN number or security numbers of cards. The card numbers themselves aren't typically encrypted at the cash registers, also called point-of-sale systems.

This new system involves installing a tamper-resistant security module (TRSM) at the point-of-sale system. When a card is swiped, the TRSM encrypts the card's number with a public key using Identity Based Encryption, and it is sent to the Heartland gateway.

"The HSM controls the process of decrypting the private key," Spies said. This system will use a technique called format-preserving encryption (FPE), which means the encrypted numbers will be the same length as the original card numbers, allowing the encrypted numbers to be used in other database systems as identifiers, rather than the original numbers.

Heartland piloted a few test systems with merchants last year and now plans to start offering the service to all its customers. Because moving to the card encryption will require purchasing new hardware for the register, Heartland will offer the end-to-end encryption as an opt-in.

But the upgrade may have its upside for merchants -- Carr said that if the merchant implements the system correctly and it then suffers a breach involving the leakage of card numbers, then Heartland will assume the liability for the breach.

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