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 early 2000s, One-Time Passcodes (OTPs) have been a popular way to verify online transactions. Banks, fintechs, and financial services used OTPs to add extra security beyond traditional passwords. By generating a unique code for each transaction or login, OTPs introduced a second layer of protection - usually through two-factor authentication (2FA).
OTPs were also convenient. Users could quickly verify their identity without complicated steps. However, as cyber threats have become more advanced, OTPs - especially SMS-based OTPs - are no longer as secure as they once seemed.
In fact, SIM-swapping attacks have doubled in just a few years. Complaints to the FCC increased from 275 cases in 2020 to 550 cases in 2023. This rising threat highlights the growing risks of relying on OTPs in sensitive industries like finance and banking.
In this article, we’ll break down the risks of OTPs and explain why more businesses are moving to stronger alternatives like biometric authentication. Let’s start with the basics.
What Is OTP Authentication?
OTP stands for One-Time Passcode. It’s a security method that verifies a user’s identity by sending a temporary code. The user enters this code to complete a login or transaction.
Usually, OTPs are paired with a password for two-factor authentication. Once used, the code expires, making it harder for hackers to reuse it.
How Are OTPs Delivered?
- SMS-based OTPs: Sent to the user’s mobile number. Easy to use but vulnerable to SIM swap attacks and mobile network vulnerabilities.
- Email-based OTPs: Delivered to a user’s email inbox. Convenient, but risky if the email account is compromised.
- App-based OTPs: Generated by apps like Google Authenticator. More secure, but requires users to set up an app in advance.
Why OTPs Are Becoming Risky
Despite their convenience, OTPs are now a major target for cybercriminals. Common attack methods include:
- SIM Swap Attacks: Fraudsters trick mobile carriers into transferring a victim’s number to a new SIM card, intercepting OTPs.
- SS7 Protocol Flaws: Outdated telecom systems can be exploited to intercept SMS messages, including OTPs.
- Phishing and Social Engineering: Users are tricked into entering OTPs on fake websites or sharing them with attackers.
The Problems with SMS-Based OTPs
- Weakened Security: SMS OTPs are now easily intercepted or bypassed by modern hackers.
- Delivery Issues: Messages can be delayed or lost due to poor signal, roaming, or carrier errors.
- High Costs: Sending millions of OTPs per month generates large operational expenses for banks and fintechs.
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Better Alternatives to OTP Authentication
To stay ahead of attackers, businesses are moving toward stronger, more reliable authentication methods:
1. Biometric Authentication with Liveness Detection
Biometric authentication uses fingerprints, facial recognition, or iris scans. Advanced systems integrate liveness detection, ensuring that a real, live person is present - not just a photo or video. This makes it extremely difficult for fraudsters to spoof the system.
2. Passwordless Authentication
Passwordless systems remove the need for both passwords and OTPs. Instead, users authenticate with biometrics, security keys, or device-bound links. Benefits include:
- Stronger protection against phishing and SIM swapping.
- A smoother user experience with fewer login barriers.
- Lower operational costs by eliminating SMS fees and password resets.
Why Moving Beyond OTPs Matters for Finance and Banking
Financial institutions face increasing pressure to secure customer accounts and protect sensitive data. Today’s leaders are adopting:
- Biometric Authentication: Enhanced with liveness detection to stop spoofing.
- Passwordless Solutions: Faster, safer, and more convenient for users.
- Adaptive MFA: Dynamic authentication based on user behavior and device security.
Privacy is also critical. That’s why new solutions like Keyless’ Zero-Knowledge Biometrics (ZKB) ensure that no biometric data is ever stored or shared, helping banks stay compliant with regulations like GDPR.
Conclusion: OTPs Are No Longer Enough
While OTPs once served as a valuable security tool, today’s digital landscape demands stronger protection. The risks of SIM swapping, protocol flaws, and phishing make OTPs an increasingly unreliable method.
Forward-looking organizations are upgrading to privacy-first, biometric-based authentication solutions. By doing so, they’re not just protecting transactions - they’re building trust and delivering safer digital experiences.
Ready to move beyond OTPs? Discover how Keyless can help you upgrade your authentication systems, improve customer experience, and protect your business. Book a personalized demo today.
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