Business Opportunities: On-Line Articles - Identity Security Is a Growing Issue For Businesses of All Types

Identity Security Is a Growing Issue For Businesses of All Types
by Michael J. McDermott

"It's all about the address, Adam." As cryptic remarks go, this one might not be up there with "The lady doth protest too much, methinks." But repeated over time, it was enough to spark the creation of a brand new business, one that has quickly established itself as a leader in its field.

"About once a week or so, Bob would walk into my office and announce, "It's all about the address, Adam. I haven't got it all figured out yet, but it's all about the address. "Then he'd turn around and walk out," recalls Adam Elliott, president and co-founder of ID Insight Inc.

The "Bob" in question is ID Insight' other co-founder and vice president of business development, Bob Clark. At the time, Elliott was president of ChexSystems, Inc., a subsidiary of eFunds Corp., and Clark was the company's director of fraud products. The partners focused on the role a person's address plays in financial fraud, and eventually they came up with a thesis on which they would found ID Insights in 2002: All identity theft involves address manipulation. "The reason we started the company was because we realized nobody else was focusing on this," he says.

Identity theft-the act of obtaining another person's identifying information and using it to make fraudulent transactions in the victim's name-is the fastest-growing crime in the United States, with 27,000 new victims emerging every day, according to the Federal Trade Commission. Financial losses due to identity theft run about $50 billion a year.

In the financial services industry, identity theft is defined as the use of stolen ID information to open a new account or take over an existing account in the victim's name. Of the two, new account fraud receives more attention, and rightly so, Elliott says.

Identity theft is the fastest-growing crime in the nation, costing $50 billion a year.

New account fraud losses per incident can run into the tens of thousands of dollars, it happens much more frequently than account takeover does, and the victims often remain unaware of the crime for months or even years. "In many cases they don't find out until they get that knock on the door from a collections agent or a law enforcement official," he says.

In the case of account takeover, the identity thief targets an existing account of the victim. Armed with the victim's identifying information, the thief calls the victim's financial institution and changes the address (and possibly the phone number) to a new one to which the ID thief has access. A few days later the crook calls again, this time requesting a new credit card, debit card or checks.

DEVASTATED VICTIMS

While it is less widespread than new account identity theft, this form of ID theft can be devastating to its victims-especially in retail banking, where tens of thousands of dollars can disappear from the victim's account overnight.

In cases of new account ID theft, the perpetrator usually uses the information to obtain a new credit card in the victim's name, and the stolen funds are taken from the card issuer. With account takeover fraud, victims suddenly find themselves fighting to clear their identities and recover their own money.

"All indications are that account takeover fraud is on the rise, which is not surprising," Elliott says. "The identity thief will always seek out the system with the fewest controls. By not implementing solutions to address account takeover, businesses are, in essence, laying out the red carpet to seasoned criminals."

A class of solutions known as ID verification suites was developed to deal with identity theft by matching credit applications against information in existing databases. These programs all seek to answer the question, "Are you who you say you are?" They represent the solution set that is still primarily used today, but there are chinks in its armor.

"ID verification solutions can help detect a criminal attempting to perform a fraudulent transaction with a fictitious identity, but they have little impact on a true identity theft situation," Elliott explains.

While new approaches to identity theft protection-such as biometrics and the creation of a national ID card-are promising, it will take many years and millions of dollars in development funds before they are in widespread usage.

With account takeover fraud, victims must fight to recover their own money.

Even then, he adds, seasoned criminals will likely find ways to get around whatever roadblocks are thrown in their path. "There is no end state in the fight against identity theft; it's a constant battle, much like the war on terrorism," he says. "Since identity thieves are constantly adapting their tactics to thwart prevention measures, we need to be constantly innovating with new measures.

" The driving force behind ID Insights is the belief that a focus on the address is the most promising approach that can be deployed to the market in a responsive manner. While identity thieves can steal information about victims and use it to open new accounts or take over existing ones, they do not receive mail at the victim's address and therefore must manipulate the address in order to do so, Elliott says.

"About 20% of all applications include an address mismatch. The obvious solution might seem to be just to reject those applications, but it's not that simple" he explains. "About 15% of households have a legitimate address change every year, and no company can afford to reject 15% of its legitimate potential customers and still hope to stay in business."

"GOOD" MISMATCHES

And that's where creativity comes into play for ID Insights in a big way. With Clark's knowledge about the ways and wiles of scam artists and Elliott's ability to slice and dice data, the partners believed they could come up with a reliable way to tell "good" address mismatches from "bad" ones.

The result was Address Differential Analysis (ADA), a patented analytic engine technology that ID Insights uses to create more-effective fraud detection applications for financial services firms.

"It's all database, analytics, algorithms and artificial intelligence stuff, but conceptually we think of it as finding out everything there is to know about the two addresses in question," Elliott says.

ADA algorithms are driven by inputs from more than 20 sources of demographic, governmental, suspect address and proprietary databases. The ADA analytic engine produces an address differential score (ADScore) which predicts the legitimacy of the move and the likelihood of an identity theft in process.

Elliott and Clark are closemouthed about the variables ADScore uses and the weights it assigns to different factors. But as a general illustration of the principles behind it, Elliott points to an address change from an affluent suburban area to a low-income urban area or one from a heavily residential area to a primarily industrial or commercial area as the types of incongruities that might be of interest to ADScore.

Based on data studies conducted for several financial institutions, ID Insight has been able to demonstrate a significant gap between results achieved using traditional approaches and ADScore's analytic approach, Elliott says.

"The difference represents real dollars and improved customer relations for financial institutions," he says. "Using ID Insight's technology, they can detect more cases of identity theft in both new and existing accounts and save time and money on fraud investigations."

About 15% of a business's customers have a legitimate address change every year.

Elliott and Clark came up with the idea for ID Insights and launched the company using their own money. In a very real way, they risked everything they had on their creativity. There have been some anxious moments over the past four years, but things have begun to turn their way. The company signed its first Fortune 20 client last fall, landed deals with three of the top 10 banks and recently completed its first acquisition.

While all of those accomplishments are rewarding, "The greatest one is having done it on our own, with our own finances," Elliott says. "It hasn't all come up roses yet, but I proved to myself that I could take an enormous risk."