In the last two years, more than 100 million personal records have been lost or stolen, according to the Privacy Rights Clearinghouse. The greatest threat to consumers is that fraudsters will take out credit in the victim’s name, using their identity information for verification. Once new accounts are opened, a fraudster may even make minimum payments for a period of time to increase the credit limit. The fraudster then uses up all the available credit and vanishes.
Javelin Research estimates the average fraud cost per victim at $6,383, with the total cost of identity fraud estimated at $49.3 billion in 2006. But it’s primarily the defrauded businesses absorbing these costs, not consumers.
What are credit grantors doing to fight this? Not much.
The reality is that banks have a hard time telling if the individual in question was a fraudster or simply someone who wouldn’t or couldn’t pay their bills. It takes work to figure it out, with the effort traditionally performed by fraud analysts working the phones to try to solve it. It’s a costly approach that hasn’t scaled well as identity fraud losses have risen in recent years.
Two things need to happen to adequately address the problem of identity fraud: banks need to take responsibility and step up efforts, and they need to adopt new technologies to solve it.
Although it’s impossible to report accurate numbers, it’s a well known fact in the banking industry that an enormous amount of fraud goes undetected, and actually gets written off as a credit loss. These businesses would argue that the costs associated with detecting fraud need to be balanced against the actual cost of fraud losses. What they won’t tell you is that even if they are able to prove fraud, a credit loss rests easier on the bottom line than a fraud loss.
While IT has certainly revolutionized financial services in the last decade, fraud detection remains one of the last holdouts. It’s not for lack of technology; many enterprising companies with deep expertise in the area have come forward with solutions. But most of these solution providers are large companies whose primary business is analytics or data aggregation. The solutions they offer are typically client-server based, requiring months or even years of installation and training, and entirely lacking the ability to stay up-to-date with new fraudster techniques, which evolve almost daily.
The field is green for startups whose sole focus is fraud detection, applying custom-developed solutions relying on the latest technology advancements. But the ground is only as fertile as banks will allow it to be. As long as they stay mired in manual fraud detection processes with no financial incentive from management to unmask credit loss as fraud loss, technology solution providers have a tough row to hoe.
7 Comments
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Courtney Benson said:
I’m in total agreement with you on this Ken. Until and unless the risk bearer becomes the financial institution customers and companies will bear the burden. The other possibility is that customers start showing their dissatisfaction via their wallets and Washington and that will take a lot of time and effort.
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Courtney Benson said:
UPDATED - I’m in total agreement with you on this Ken, until and unless the risk bearer becomes the financial institution, customers and companies will bear the burden. The other possibility is that customers start showing their dissatisfaction via their wallets and Washington and that will take a lot of time and effort.
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Tom Fragala said:
Ken,
I agree that there is no lack of anti-fraud solutions for financial institutions. If one does a little research, the number of companies is overwhelming.
But Javelin, in their 2006 Identity Fraud Survey Report (consumer version), page 5 highlighted an overlooked but critical trend:
“Javelin research reveals that contrary to popular opinion, consumers see themselves as the primary persons responsible for the security of their financial assets and want to take more active roles in this process. They only need direction on the most appropriate actions to take. Vigilant institutions in partnership with empowered and educated consumers are the best defense against the ever-shifting identity criminals.”
Most reasonable anti-fraud and recovery solutions sell into the FI enterprise for internal use as you clearly state. Consumers are eager to take control, but there’s no safe, easy and effective solutions for them. The only services that exist today require the consumer to provide personal sensitive data like SSN and even power of attorney to a third-party. This is a non-scalable concept that most consumers reject (for good reason).
As an ID theft victim and trained counselor, with 15 years IT experience, I am about to announce the release of an easy and effective self-help service for consumers, called myTruston. It aids with both ID theft detection and recovery. http://www.mytruston.com.
Because the problem is so large and the alternatives are so poor, the mindset of consumers has CHANGED. People want and need a way to deal with the identity theft problem in a self-service way. It’s almost counter to what you might think, but people’s IDENTITY and financial well-being are so important to them, they feel a need and a responsibility to do something about it themselves. That’s where we come in.
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Matt said:
Agreed! Seems like there’s an incredibly simple solution.
Why can’t I “lock-down” my credit history? I’m willing to take the hit of a delay next time I need credit in order to curb this fraud.
Actually, I believe you CAN actually lock down your credit report from the bureaus . . . however, they charge you for this!
Insane!
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Mashhood said:
well, they also sell you insurance against id theft, why they would do anything to stop it, when they can get money out of your pocket.
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Paul Sweeney said:
Well there are several interesting points there. Absolutely, the problem cannot be addressed until it is surfaced. Will customers want to engage in processes that protect their money? Absolutely. With nearly 100% of people carrying mobile phones, surely there is a way to validate on-line and off-line purchases? I think the Gomez watchfire report tracks these issues? http://www.watchfire.com/news/whitepapers.aspx But perhaps more fundamentally, there are ways to think of “credit worthiness” and “fraud” in social terms, and to adopt social networking models to combat these. Perhaps thinking might shift from considering this as an “institutional issue” and to start thinking of it as an “interaction issue”, and a social cost? Again, I don’t know, I am not an expert.
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David Thompson said:
Fraud mitigation is the result of putting up defenses on multiple fronts; directly involving the consumer is a critical one. There is a lot of market evidence supporting the idea that the only way consumers will get effectively involved is to have an intelligent and frictionless process that is easy and unobtrusive for them. Just because a customer wants to get involved does not mean they will adopt any technology. It needs to be something familiar, easy to use, convenient and always connected. My company, ClairMail, has focused on the mobile channel and using the current functionalities that already reside on cell phones as an efficient medium to support these requirements.
Both consumers and banks have incentives to protect their respective assets. Financial institutions should focus more on easily integrating customers into the right process.
David Thompson
VP of Marketing
ClairMail
