Click Cover to Read Digital Edition



Shared Servicing & Outsourcing
Feb. 23-24
San Francisco
ABA Mutual Community Bank Conference
March 1-5
Gaylord Palms Resort
ABA Mutual Community Bank Conference
March 22 & 23
Marriott Marquis
Washington, D.C.
Card Forum & Expo
April 8-10
More events >  

<- Back

Share |

Print Friendly and PDF

Settling the Score

By: Terrence DeFranco

Credit monitoring has been used for years to detect identity theft and fraud. Risk managers and banks encourage consumers to monitor their credit  reports for unusual inquiries and to notify their creditor immediately if they find any.

What many people don’t know is, credit monitoring doesn’t detect identity fraud, only the subsequent crime — most commonly credit card fraud and mortgage fraud — once an identity had been stolen or manipulated.

There is a better solution to detect and prevent identity fraud and lower the resulting risks. It’s called identity scoring, which goes well beyond credit activity to scrutinize a wider set of data attached to identities and flag suspicious activity before any fraud occurs.

Indeed, identity scoring has such potential to limit identity fraud that Gartner Inc. of Stamford, Conn., stated in a recent study, “Identity scoring services will overtake credit monitoring as an effective identity theft prevention tool by year-end 2009.”

Shortfalls of credit monitoring
Credit monitoring only detects credit-related fraud, such as credit card fraud, mortgage fraud and, in some cases, health care fraud. It doesn’t detect manipulation of Social Security numbers — the most prevalent and dangerous form of identity fraud.

Known as synthetic identity fraud, it occurs when a criminal alters parts of an individual’s identity — usually the name and Social Security number — to create new, fake identities.

Synthetic fraud is especially dangerous because consumers rarely know when they’re victims. Since the manipulated combinations of their names, addresses and Social Security numbers don’t match one person, nobody reports the fraud. Instead, credit bureaus create “subfiles” for the new accounts, which the criminal uses to establish new credit histories.

In fact, when it comes to detecting identity fraud, a credit report is the last place to look. After criminals steal an identity, they don’t necessarily commit credit-related crime first, or even at all. Instead, they typically use the identity to establish non-credit related accounts, such as utility or telephone accounts, which establish the identity’s legitimacy. After that, the criminal might or might not use the identity to apply for credit.

This means fraudulent credit lines don’t show identity fraud. They only show the crime that identity fraud enabled (credit card fraud, mortgage fraud). Identity fraud happens long before any evidence shows up on a credit report.

Herein lies the biggest reason credit monitoring falls short in detecting identity fraud:  Consumers are still left scrambling to reclaim their identities and finances. Banks write off the fraud as a credit loss and consumer banking confidence and business dwindles.

That’s why there needs to be more scrutiny up front when detecting and preventing identity fraud, before criminals can steal and manipulate identities and use them to swindle money and other assets from consumers and businesses.

Scoring the difference
Identity-scoring software fills the gaps that credit monitoring leaves behind. Unlike credit monitoring, identity scoring examines all data attached to an identity, such as credit activity, Social Security number use, related identities (which are likely synthetic), and more.

It also looks in all locations where the identity might exist, including credit bureau databases, public records such as divorce and real estate documents, non-public records such as driver’s license and voter’s registration, and other contributory databases.

Financial institutions and other organizations that check identity information can run identity-scoring software before opening new accounts and accepting new identities into their database to ensure the identity’s authenticity. The software scrutinizes data and activity attached to the identity, and quickly generates an “identity score.” If the software detects any anomalous activity, the identity is scored as “at risk” for fraud. If all the data matches up with the models, the identity is scored as legitimate.

Moreover, once the account is opened, identity scoring continuously monitors the institution’s database for any suspicious or fraud-like activity. If any suspect activity is detected, the software immediately alerts the institution, which can then take actions to mitigate consequences.

By looking virtually everywhere the identity exists — and at all data attached to it — financial institutions and other organizations gain the most accurate and detailed identity profile. This dramatically increases their ability to correctly judge the identity’s authenticity and minimizes the risks of lending.

In addition, continuous monitoring significantly reduces the time it takes institutions to discover fraudulent activity. This gives institutions the opportunity to stop identity fraud before its damaging effects occur. Consumers have peace of mind that their identities are secure, and their banking confidence remains intact.

Identity scoring can also help financial institutions reduce credit write-offs. Banks recognize fraud loss only when a victim steps forward and reports it. But when consumers don’t know they’re victims, banks simply classify the loss as credit write-offs.

Identity scoring gives banks a better understanding of delinquent accounts. By identifying fraudulent accounts, the software separates credit loss from fraud loss. Then as the software is used, fraud loss is reduced. The end result: fewer credit and fraud write-offs.

The best part: The scoring software quantifies all these results in a detailed analysis that includes what accounts weren’t opened due to detected fraudulent activity and what accounts would have been opened if identity-scoring software wasn’t in place. The analysis also shows the effects of each scenario, including revenue loss and savings, fraud loss and credit loss.

Future prevention
Identity scoring is a new solution to an old problem. But as Gartner’s study predicts, it will enter the mainstream as a viable solution within two years as identity fraud begins to take on new forms. The reason for the shift is twofold. First, as identity-scoring companies continue to reach out to the public, more financial institutions, organizations and consumers will understand the risks of not fully vetting identities.

Secondly, they’ll see that credit monitoring isn’t the only way to fight identity fraud. Identity data is used in many more instances than when applying for a credit card, so simply monitoring credit doesn’t detect and prevent the crime. But verifying and monitoring identity activity can, and it’s the best defense against identity fraud. 

Terrence DeFranco is CEO of Edentify, a leading provider of identity management solutions. He can be reached at 610-814-6830 or TMDeFranco(at)

Copyright © April 2007 by BankNews