Understanding the Risks of One-Time Passcode (OTP) Authentication
2 October 2024
Understanding the Risks of One-Time Passcode (OTP) Authentication
2 October 2024
Since the 2000s, One-Time Passcode (OTP) authentication has been a popular method for verifying online transactions in the banking, finance, and fintech industries. By generating a unique code for each transaction or login attempt, OTPs add an extra layer of security (usually in the form of two-factor authentication or 2FA) beyond traditional passwords. Another reason for the popularity of OTP was its convenience for users.
However, as cyber threats grow more sophisticated, one-time passcodes — especially when delivered via SMS — are becoming vulnerable to attacks like SIM swapping. Recent data shows that SIM-swapping complaints to the FCC have doubled, increasing from 275 in 2020 to 550 in 2023. These growing risks raise concerns about the reliability of OTPs as a secure authentication method, especially in sensitive sectors like finance and banking.
In today’s article, we will discuss the security vulnerabilities of OTPs. We will also explore why alternative authentication methods like biometric verification are a more secure solution for protecting sensitive transactions. Let’s kick things off with the basics of one-time passwords to ensure everyone is up to speed.
What Is OTP Authentication?
What is an OTP? Simply put, it's a security mechanism that verifies a user's identity by sending a single-use code. Usually paired with a password, it’s part of a two-factor authentication process.
What are OTPs? They’re random strings generated by secure algorithms. After delivery — via SMS, email addresses, or apps — they expire after a short window, reducing the risk of code interception.
Common Types of OTP Delivery
- SMS-based OTP: Easy and widespread but prone to SIM swap attacks and protocol vulnerabilities.
- Email-based OTP: Convenient for users who regularly access their email addresses, but less secure if email accounts are compromised.
- App-based OTP: Generated by applications like Google Authenticator, this method resists interception but requires prior app installation.
The Risks of OTP Authentication
- SIM Swap Attacks: Fraudsters impersonate victims to telecom providers and hijack their phone numbers, intercepting OTPs messages.
- SS7 Protocol Loopholes: Outdated telecom protocols can allow attackers to intercept SMS-based OTPs.
- Phishing and Social Engineering: Fake websites or messages trick users into revealing OTPs, passwords, or email addresses.
The Limitations of SMS-Based OTPs
- Security Erosion: Once seen as strong, one-time passcode systems delivered via SMS are now easily bypassed by sophisticated attacks.
- Reliability Problems: Delays due to poor signal, carrier issues, or international networks frustrate users.
- High Costs: Sending millions of OTPs messages monthly results in significant operational expenses for banks and fintechs.
Better Alternatives to OTP Authentication
Biometric Verification with Liveness Detection
Biometric methods — like fingerprints, facial recognition, or iris scans — offer much higher security. Even twins have subtle differences in their authentication factors. To counter spoofing attempts with photos or videos, modern biometrics integrate liveness detection, verifying real human presence.
Passwordless Authentication
Passwordless systems eliminate both passwords and OTPs. They authenticate users using biometrics, security tokens, smart cards, or device-bound links. This approach:
- Strengthens security against phishing.
- Improves user experience by removing password hurdles.
- Cuts operational costs linked to password and OTP management.
Why the Shift Matters for Finance and Banking
As cybercriminals evolve, reliance on one-time password OTP systems grows riskier. Institutions are moving toward:
- Biometric authentication enhanced with liveness detection.
- Passwordless solutions offering faster, safer access.
- Adaptive MFA using dynamic authentication factors based on user behavior and device security.
Banks and fintechs must also prioritize privacy. Storing biometric data on servers poses risks — that’s why new privacy-first technologies like Keyless' Zero-Knowledge Biometrics ensure no sensitive data is stored or shared.
Conclusion
One-time passcodes once played a crucial role in protecting digital transactions. But in today’s landscape of SIM swapping, SS7 vulnerabilities, and phishing, they're no longer sufficient.
Future-ready financial organizations are adopting advanced, privacy-preserving authentication methods that combine biometrics, smart cards, and passwordless frameworks. By doing so, they’re not just protecting transactions — they're building safer, more trusted digital experiences for customers.
To find out how Keyless can help your organization replace outdated OTPs, improve UX, and protect your bottom line, schedule a personalized demo today.
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