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.