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Data Breach Expenses Barely Negligible in Retailers' Financials
Tuesday, March 31, 2015 6:35 AM

A review of top merchants' financial statements found that the cost of data security breaches—while devastating to credit unions and consumers—barely makes a dent in their annual revenues.

Benjamin Dean, a fellow for Internet governance and cybersecurity at Columbia University's School of International and Public Affairs, examined 10-K reports filed by Sony, Target, and Home Depot with the U.S. Securities and Exchange Commission.

Among the findings:

  • Target's 2013 breach affected 40 million credit and debit cards and 70 million personal information records. It reported the gross expenses at $252 million. Once the insurance reimbursements and tax deductions were accounted for, the net losses totaled $105 million—equivalent to 0.1 percent of 2014 sales;  
  • In 2014, Home Depot had a breach that affected 56 million credit and debit card numbers and 53 million email addresses. The home improvement retailer incurred net expenses of $28 million after an insurance reimbursement of $15 million. Those expenses are less than 0.01 percent of Home Depot's 2014 sales; and
  • Sony reported the November 2014 hack into its computer systems, which exposed Social Security numbers and personal emails, would cost $44 million. However, estimates now put the impact at $15 million in investigation and remediation costs. These losses represent 0.9 percent to 2 percent of Sony's total projected sales for 2014.

"It therefore does not make economic sense for companies like Home Depot to make large investments in information security. As a result, they do not," Dean wrote. "The insurance pay-outs and tax deductible breach-related expenses weaken the incentives even more."

Dean also cited CUNA's research that found the Home Depot breach cost credit unions $60 million, and Dean's article was picked up by FORTUNE, CBS MoneyWatch, and The Wall Street Journal.

Target's announcement that it settled a consumer class-action lawsuit for $10 million does not mean financial institutions are being recompensed. The settlement only covers payments to consumers for damages they can prove.