Encryption in Banking Sector: A Solution to Data Security Problem

Briefing Paper

WRTG 393

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Executive Summary

Data breaches are a big risk for banks today. They can cost a lot of money, reputation, and trust. Banks
have to deal with many threats that target their sensitive financial records and change their methods
constantly. Security must be a continuous process to detect and handle new risks. Compliance must be
part of the process to follow the privacy rules for the financial industry. Data security for banks is a hard
challenge, but a holistic approach may make it easier to manage. Encryption is a key technique to
prevent data breaches and maintain online privacy and security. Encryption turns data into a secret code
that only authorized parties can read. Encryption can protect data from hackers or malicious software,
who may cause data breaches, privacy violations, and system disruptions. These can damage the bank
and cause legal and regulatory problems. Banks should use secure and effective encryption algorithms
and standards, such as AES, TDES, RSA, and ElGamal. Data that is more sensitive or valuable should be
encrypted with stronger keys or algorithms. Encryption has problems and challenges, such as key
management, data access, performance, and cloud integration. Some solutions are key control system,
encryption standards and practices, optimization techniques, and service providers. Encryption can help
banks protect themselves from cyberattacks, and comply with the data security requirements. Data
security for banks is a complex and dynamic topic that needs careful attention and planning. Encryption
is one of the important techniques for the bank to protect their data and transactions.

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The Problem

The financial industry is one of the most regulated sectors in the world, as it handles sensitive and
private data that needs to be protected. Banks have always faced threats from thieves, fraudsters, and
hackers who want to steal money or personal information from customers, employees, and partners.
That is why security is vital for the banking sector (Powell, 2006). Security in banking is not just about
securing the system, but also about adopting a multi-layered approach to protect data and prevent
cyberattacks. Banks have to deal with more complex and sophisticated threats than ever before, as they
store and process large amounts of digital data that can be accessed remotely. Data encryption is a key
component of security in banking, as it transforms data into an unreadable form that can only be
decrypted by authorized parties who have the correct key (Connolly & Begg, 2005).

Encryption in banking is the process of securing digital data using cryptography so that it can only be
read by authorized parties who have the correct key or password. Encryption is crucial for online privacy
and security, especially for banking and financial transactions that involve sensitive information such as
credit card and bank account numbers, personal identification, and income. Encryption protects this
information from hackers, cybercriminals, and identity thieves who may try to intercept or access it
without permission. Encryption ensures the confidentiality, integrity, and availability of data, which are
essential for the banking sector. The consequences of not encrypting data can be severe for banks and
their customers. Unencrypted data can be accessed, stolen, or tampered by hackers or malicious
software, resulting in data breaches, privacy violations, and system disruptions (McKnight & Tipton,
2023).

Some of the problems due to of lack of encryption in banking are:

Data breaches: Hackers can access unencrypted data easily and steal sensitive information such as
personal and financial details of customers, employees, and partners. This can result in identity theft,
fraud, and other crimes that can harm the reputation and trust of the bank. Data breaches can also
trigger legal actions and regulatory fines for violating data protection laws and regulations (Drakopoulos
et al., 2021). Some examples of data breaches in the banking industry that encryption could have
stopped or reduced are: Capital One, First American Financial Corp, and Equifax. These breaches exposed
the personal information of millions of customers, such as social security numbers, names, addresses,
credit scores, and more. The attackers used different ways to break into the systems and access the data
that was not well protected (Nadeau, 2021).

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Privacy violations: Unencrypted data can expose the personal and financial information of customers,
employees, and partners to unauthorized parties. This can violate the privacy rights and expectations of
the data subjects and cause reputational damage and customer dissatisfaction. Privacy violations can
also lead to compliance issues and sanctions for breaching data privacy laws and regulations (Tse, 2022).

System disruptions: Unencrypted data can also be altered or corrupted by hackers or malicious
software. This can affect the functionality and performance of the banking system, causing errors, delays,
or failures. System disruptions can compromise the quality and reliability of the bank’s services and
products, and damage its competitiveness and profitability (Craig, 2022).

However, encryption in banking also faces some problems and challenges, such as:

Managing encryption keys: Encryption keys are the secret codes that are used to encrypt and decrypt
data. They need to be stored, backed up, rotated, and updated securely and efficiently. However,
managing encryption keys can be a complex and time-consuming task, especially when dealing with a
large number of keys or different types of encryption algorithms. If encryption keys are lost, stolen, or
compromised, the encrypted data becomes inaccessible or vulnerable to attacks (Fornetix, 2019).

Accessing encrypted data: Encryption can protect data from unauthorized access, but it can also make it
harder for authorized users to access the data. For example, if a user forgets their password or loses
their decryption key, they may not be able to access their own encrypted data. Additionally, encryption
can create compatibility issues with different systems or applications that need to access the same data.
For instance, some encryption methods may not work well with cloud-based services or mobile devices
(Fornetix, 2019).

Performance impact: Encryption can affect the performance of systems or networks that handle
encrypted data. Encryption requires computational resources to process the data, which can slow down
the speed or increase the latency of data transmission or storage. Moreover, encryption can introduce
additional overhead or complexity to the data, which can increase the bandwidth or storage
requirements. Therefore, encryption needs to be balanced with the performance needs of the system or
network (Sengupta, 2022).

Integration with cloud-based systems: Cloud-based systems are becoming more popular and widely
used for data storage and processing. However, encryption can pose some challenges when integrating
with cloud-based systems. For example, some cloud providers may not support the encryption methods
or standards that the user prefers or requires. Alternatively, some cloud providers may offer their own

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encryption services, but the user may not trust or control the encryption keys or policies. Therefore,
encryption needs to be carefully considered and configured when using cloud-based systems (Sengupta,
2022).

A Potential Solution
The potential solution to the problems discussed above is to use strong encryptions methods. There are
different types of encryption methods that banks and financial institutions can use, depending on their
needs and preferences. Some of the common types are:

Asymmetric encryption: This type uses two different keys, one for encryption and one for decryption.
The encryption key is public and can be shared with anyone, while the decryption key is private and kept
secret by the owner. This type is more secure but slower than symmetric encryption. It is used for digital
signatures, identity verification, and cryptocurrency transactions (Smirnoff & Turner, 2019).

Figure: Symmetric Encryption (Thakkar, 2020)

Symmetric encryption: This type uses one secret key for both encryption and decryption. The key is
shared between the sender and the receiver of the data. This type is faster but less secure than
asymmetric encryption. It is used for credit card transactions, data storage, and data transmission
(Smirnoff & Turner, 2019).

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 Figure: Asymmetric Encryption (Thakkar, 2020)

Encryption in banking is not only important for protecting data from external threats, but also for
complying with various laws and regulations that require data security and privacy. For example, the
Gramm-Leach-Bliley Act (GLBA) and the Federal Financial Institutions Examination Council (FFIEC)
mandate that banks and financial institutions encrypt any non-public personal information (NPI) of their
customers, such as name, address, social security number, income, and transaction history (Probasco,
2017). Encryption also helps banks and financial institutions avoid the costs and damages of data
breaches, such as fines, lawsuits, reputation loss, and customer dissatisfaction.

As, encryption in banking also faces some problems and challenges, some of the possible solutions for
these problems and challenges are:

Using a key management system: A key management system is a software or hardware solution that
helps manage encryption keys throughout their lifecycle. It can generate, store, distribute, rotate,
revoke, and audit encryption keys in a centralized and secure manner. It can also automate key
management tasks and enforce encryption policies. A key management system can reduce the
complexity and risk of managing encryption keys and improve the security and efficiency of encryption
processes (Cybersecurity Challenges in Banking & Future-Proof Solutions, 2022).

Using encryption standards and best practices: Encryption standards and best practices are guidelines
and recommendations for implementing encryption in a secure and effective way. They can help ensure
the compatibility, interoperability, and quality of encryption methods and systems. They can also help
prevent common encryption errors and vulnerabilities. Some of the encryption standards and best

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practices include the Advanced Encryption Standard (AES), the Data Encryption Standard (DES), the
Secure Hash Algorithm (SHA), and the Transport Layer Security (TLS) protocol (Cybersecurity Challenges
in Banking & Future-Proof Solutions, 2022).

Using encryption optimization techniques: Encryption optimization techniques are methods and tools
that can improve the performance and scalability of encryption processes. They can help reduce the
computational and storage overhead of encryption and increase the speed and throughput of data
transmission and storage. Some of the encryption optimization techniques include compression,
deduplication, caching, parallelization, and hardware acceleration (Cybersecurity Challenges in Banking
& Future-Proof Solutions, 2022).

Using encryption service providers: Encryption service providers are third-party companies that offer
encryption services to customers. They can provide encryption solutions that are tailored to the
customer’s needs and preferences. They can also handle the encryption key management and
encryption policy enforcement for the customer. Encryption service providers can help customers
leverage the benefits of encryption without having to deal with the challenges and complexities of
encryption implementation and management (Cybersecurity Challenges in Banking & Future-Proof
Solutions, 2022).

Summary

Encryption is a way of making data unreadable to unauthorized parties, and it protects the
security, privacy, and reliability of the data. Encryption is essential for online privacy and
security, especially for banking and financial transactions that have sensitive information.
Without encryption, data can be accessed, stolen, or tampered by hackers or malicious
software, resulting in data breaches, privacy violations, and system disruptions. These can harm
the reputation and trust of the bank, and cause legal and regulatory issues. To prevent or
mitigate these problems, banks should use secure and effective encryption algorithms and
standards, such as AES, TDES, RSA, ECC, and ElGamal. Banks should also manage the keys used
for encryption and decryption securely and efficiently, and apply encryption based on the risks
and benefits of different types of data and systems. Encryption has issues and challenges, such
as key handling, data access, performance, and cloud compatibility. Some solutions are key

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control system, encryption standards and practices, optimization methods, and service
providers. Encryption can help banks avoid or reduce the impact of cyberattacks, and comply
with the data security requirements of the financial industry.

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