If you haven’t heard about the Target data breach by now, here is the short version: a massive identity theft operation was perpetrated against retail-giant Target (NYSE: TGT) and involves the financial information of as many as 70 million customers.
If your data was stolen, the risk of having this information used to steal your money is very real.
Data security breaches like the Target data breach aren’t altogether uncommon. Sadly, these kinds of events are becoming more commonplace in our digitally connected society.
The process, while technically complicated, is pretty simple to understand on a basic level.
A large retail company or payment processing company uses digital systems to store and process financial information. Hackers gain access to this information and then sell it on the black market. The criminals who purchase this information then use it to make unauthorized purchases, often to buy Visa (NYSE: V) or Mastercard (NYSE:MA) pre-paid debit cards that they can spend anywhere they please.
How You Can Profit from the Target Data Breach
The market for data security services is booming. After several high profile data security breaches involving big names like Sony (NYSE: SNE), Heartland Payment Systems (NYSE: HPY) and T.J. Maxx (NYSE: TJX), retailers large and small are spending heavily on data security.
Retailers will turn to hardware companies like Verifone (NYSE: PAY) for the latest technology in secure point-of-sale systems, or POS. One of the prevailing theories for how the Target data breach was conducted is that malware infiltrated the retail giant’s POS system and stole the credit and debit card data as customers swiped at the register.
Since news of the Target data breach, Verifone stock is up almost 27%.
Believe it or not, Amazon (NASDAQ: AMZN) is also a likely winner here. Amazon’s payment processing services and order fulfillment services look more and more attractive to other retailers…even some of Amazon’s competitors.
I recently paid for an order placed on an Amazon competitor’s website with my Amazon account. I couldn’t believe it at the time but, when I thought about it, I realized that it is a cost-effective way for the competitor to eliminate its risk of data theft and push it onto Amazon.
Many individuals and families turn to LifeLock (NYSE: LOCK) for peace of mind. LifeLock’s model is different than those of the data security companies. LifeLock actively monitors your accounts for identity theft and, if it does occur, automatically reimburses you for up to $1,000,000 in losses and goes after the retailer or criminal directly. I am a customer of LifeLock myself.
Shares of LifeLock are up more than 27% since news of the Target data breach.
The big losers in this kind of situation are the retailers themselves.
Generally, victims of identify theft associated from a data breach of this kind are reimbursed by their financial institution directly. Then the financial institution goes after the retailer for reimbursement.
Financial institutions incur significant costs associated with replacing cards for compromised accounts and also require a lot of labor hours to process the mess. The cards themselves usually cost around $10 a piece, plus the labor and systems costs associated with changing account numbers.
Banks and retailers have long disagreed about who should pay the costs of reissuing cards and account numbers.
Banks say the retailer should be responsible for all costs associated with the breach. Retailers say banks should bear the responsibility because they failed to use technology available to keep accounts safe.
Some financial institutions, like Wells Fargo (NYSE: WFC) have opted to replace cards only as issues arise. Others – like J.P. Morgan Chase (NYSE: JPM) – have opted to replace any card believed to be involved in the Target data breach.
This is expected to be a major topic of discussion when the Target CFO testifies before a U.S. Senate committee on February 4.
The Bottom Line
In a cyber security breach involving massive retailers there are clear winners and losers.
From a stock perspective, you can expect shares of the retailer in question to take a major hit. Target shares are down 8% since announcing the breach on December 19.
You can also expect shares of data security companies to get a boost. Retailers that don’t protect their data well will require the services of these companies and companies that already use their services will need them even more.
The ugly reality is that cyber crime and data theft are big business.
But so is preventing these crimes from happening in the first place. Owning stocks of companies involved in this kind of security is a good (and legal!) way to profit from these kinds of breaches.
And you can be certain we’ll see more like the Target data breach in the future.
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