A 2023 Statista study found that SMS and email timed-based OTPs remained the most prevalent types of multifactor authentication in the world. One Time Passwords have been the cornerstone of digital security, providing an extra layer of protection for online services. However, as technology changes and improves day by day, so does the ability of fraudsters to exploit vulnerabilities.

This article explores OTP authentication, its types, the drawbacks of traditional OTPs, digital fraud statistics due to OTP mishandling, strategies to mitigate such frauds, alternative authentication methods, and challenges from both user and organizational perspectives.

What is an OTP?

A One-Time Password (OTP) is a single-use code sent to a user to authenticate their identity, typically used in two-factor authentication (2FA) systems using an OTP sender. OTPs are delivered through SMS, email, or dedicated authenticator apps, and are valid for a short period or a single transaction, reducing unauthorized access risks compared to static passwords.

Types of OTP Authentication

1. SMS-based OTP: Sent to the user's registered mobile number via SMS using an online SMS verification service.  
2. Email-based OTP: Sent to the user's email address.
3. App-based OTP: Generated by mobile applications like Google Authenticator or Authy.
4. Push-based OTP: Delivered via push notifications from authentication apps.
5. Hardware tokens: Physical devices generating OTPs, such as RSA SecurID tokens.

Drawbacks of Traditional OTPs

Despite their popularity, traditional OTPs have several significant drawbacks:

1. Susceptibility to Phishing Attacks: Cybercriminals can trick users into revealing their OTPs through phishing. These attacks often involve fraudulent websites or messages that appear legitimate but are designed to steal OTPs and other sensitive information.
   OTP SMS fraud prevention methods should be used to avoid such shortcomings.
2. SIM Swapping: Attackers can hijack a user's mobile number by convincing the telecom provider to transfer the number to a new SIM card, gaining access to SMS-based OTPs. This type of fraud has become increasingly common and poses a significant threat to the security of SMS-based OTPs.
3. Man-in-the-Middle Attacks: Hackers can intercept OTPs during transmission, especially in unencrypted channels like SMS. This can occur through techniques such as SS7 attacks, where vulnerabilities in the signalling system of mobile networks are exploited.
4. User Inconvenience: Entering OTPs can be cumbersome, leading to poor onboarding experience and potential abandonment of transactions. Users may find it tedious to switch between devices to retrieve and enter OTPs, especially if they are required frequently.
5. Reliability Issues: Delivery delays and failures in receiving OTPs can frustrate users and disrupt services. Network issues, spam filters, and other factors can cause OTPs to be delayed or not delivered at all.
6. Scalability Concerns: Managing OTPs for a large user base can be challenging and resource-intensive for organizations. Ensuring timely delivery, handling support requests, and maintaining security can be complex and costly.

Statistics About Digital Frauds Due to OTP Mishandling

The rise in digital fraud highlights the vulnerabilities of OTP authentication. According to various reports:

• The FTC reported a 300% increase in SIM swap fraud in the U.S. from 2016 to 2020.

• In 2019, the UK's FCA revealed that £2 billion was lost to online banking fraud, much involving compromised OTPs.

• A study by Javelin Strategy & Research found account takeover fraud, often involving OTP interception, resulted in $5.1 billion losses in the U.S. in 2020.

• Symantec reported that 80% of targeted attacks use stolen credentials, often obtained through phishing or SIM swapping that compromises OTPs.

What Can Businesses Do to Overcome Such Frauds?

To mitigate the risks associated with OTP authentication, businesses can implement several strategies:

1. Enhanced Authentication Methods: Combine OTPs with biometrics or hardware tokens for additional security. This approach adds an extra layer of security, making it more difficult for attackers to gain unauthorized access.
2. Behavioral Analytics: Analyze user behavior patterns to detect and prevent fraudulent activities like AIT. This can help identify suspicious activities that may indicate an account compromise.
3. Encryption: Ensure OTPs are encrypted during transmission to protect against interception. Using secure communication channels and protocols can help safeguard OTPs from being intercepted by attackers.
4. User Education: Educate users about the risks of phishing and SIM swapping and provide guidelines for safeguarding their OTPs. This includes advising users on how to recognize phishing attempts and the importance of securing their mobile devices.
5. Regular Audits: Conduct regular security audits to identify and address vulnerabilities in the authentication process. By continuously monitoring and improving security measures, businesses can better protect themselves and their users.

Alternatives for Traditional OTPs

Given the drawbacks of traditional OTPs, several alternative authentication methods are gaining traction:

1. Biometric Authentication: Uses unique biological traits such as fingerprints, facial recognition, or voice patterns to verify identity. Biometric authentication is difficult to replicate or steal, offering a higher level of security compared to OTPs.
2. Hardware Tokens: Physical devices generating time-based or event-based OTPs, providing a more secure alternative to SMS-based OTPs. Hardware tokens are not susceptible to phishing or SIM swapping attacks.
3. Push Notifications: Send authentication requests to a user’s mobile device, where they can approve or deny access. Push notifications are less prone to interception and can provide a more seamless user experience.
4. Passwordless Authentication: Uses public key cryptography for secure login without passwords, reducing the risk of credential theft. Methods like Silent Authentication, WebAuthn and FIDO2 are examples of this approach. You can get in touch with the team at Message Central to enable the same.  
5. Risk-Based Authentication: Analyzes various risk factors, such as device information and user behavior, to determine the appropriate level of authentication required. Risk-based authentication can adapt to changing threat levels, providing dynamic security measures.

Problems from the User's Perspective

From a user's perspective, OTP authentication can present several challenges:

1. Inconvenience: Users must carry mobile devices or hardware tokens at all times to receive OTPs. This can be inconvenient, especially if users are required to authenticate frequently or if they lose access to their devices.
2. Delays: Network issues or system glitches can delay OTP delivery, causing frustration and potential access issues. Users may be locked out of their accounts if OTPs are not delivered in a timely manner.
3. Complexity: Users may struggle with understanding and managing different types of OTPs, especially if multiple authentication methods are in use. This can lead to confusion and increased support requests.
4. Security Risks: Users may be unaware of the risks associated with OTP interception and SIM swapping, making them vulnerable to attacks. Educating users on these risks and how to mitigate them is essential like how to add their numbers in the DND list.  
5. Dependence on Devices: Loss or malfunction of the OTP receiving device can lock users out of their accounts. This reliance on a single device can be a significant drawback, especially if users do not have backup authentication methods.

Problems from the Organization's Perspective

Organizations also face several challenges when relying on OTP authentication:

1. Security Risks: OTPs can be intercepted or phished, leading to unauthorized access and potential data breaches. This can result in significant financial and reputational damage for organizations.
2. Cost: Sending OTPs via SMS or maintaining hardware tokens can incur significant costs, especially for large user bases. Organizations must balance the cost of implementing and maintaining OTP systems with the benefits of enhanced security.
   Although there are some free SMS verification services, but they are with hard limits.  
3. User Support: Providing support for users experiencing issues with OTP delivery or entry increases operational overhead. This includes handling support requests, troubleshooting issues, and educating users on best practices.
4. Scalability: Managing OTP generation, delivery, and verification for millions of users can strain IT resources and infrastructure. Ensuring the system can handle peak loads and maintain high availability is critical. Rather than having your own system you can integrate with us for a secure, highly reliable and cost-effective OTP verification system for your business. Get in touch with our team at Message Central to know more about our services.
5. Compliance: Organizations must ensure that their OTP implementation complies with regulatory requirements and industry standards. This includes adhering to data protection laws and maintaining secure authentication practices.

Conclusion

Even while OTP authentication improves digital security, it is impossible to overlook its flaws and vulnerabilities in the face of growing cyberthreats. It is important to note that, both users and organisations experience several issues with traditional OTPs, ranging from phishing attacks and SIM swapping to cumbersome methods and organisational costs.  

To combat these challenges organizations, have to consider and seek for better and safer methods such as Biometric identification, hardware token, notifications, and password less identification.  

By remaining up-to-date with the current trends and inventions in the application of digital security, organizations shall be well equipped to safeguard its users and resources in the ever-growing cybersecurity threats.