Everything Must Go: Risks of Implementing RFID for Retail Companies

A major goal of retailers is to enhance supply-chain management. By improving control over goods in transit, shipping times and costs are reduced. Radio-frequency identification, or RFID, technology uses radio waves to send data from microchips (called tags) to databases. This provides retailers and their suppliers with end-to-end inventory transparency, helping them to analyze and react to stock depletion, shipment locations and supply-chain delays for time-sensitive events, such as holidays or promotions.

While supply-chain management is paramount to a retailer's success, its disruption could likewise be devastating. According to researchers at Vrije Universiteit Amsterdam, RFID tags are vulnerable to computer viruses. A false tag on merchandise could deliver a virus to the RFID middleware server and eventually infect the databases. Then backdoors could be installed to exploit subsequent tags and the database, wreaking havoc within the enterprise.

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In addition to monitoring merchandise, RFID's smart technology keeps track of the spending habits of customers. A recent report issued by the Department of Homeland Security recognizes the benefits of RFID technology, except where the risks to privacy outweigh the benefits. With the threat of litigation, financial losses and reputational damages hanging over retailers' heads in light of emerging laws governing the use of sensitive information, they are thinking twice about the implementation of RFID. When Pfizer tags Viagra bottles to prevent counterfeit drugs, for example, privacy advocates fear that the chips can track consumers' buying habits and transmit other personal information.

Consequently, proposed laws that seek to limit the use of RFID devices because of data privacy and security concerns are under discussion in 19 states. In fact, in Wisconsin a law became effective on June 14, 2006, that bans the forcible implantation of RFID tags in humans. Is it a coincidence that June 14 is also Flag Day--a celebration of a symbol of freedom?

--Kevin P. Kalinich is co-national managing director of professional risk solutions for Aon Financial Services Group.

August 1, 2006

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