United States-based lending institutions are losing more than $1 billion each year to identity theft, a figure that is likely to grow short-term, according to a report recently released by TowerGroup.
The report, entitled "Identity Theft: Lenders Are Victims, Too," noted the rate of ID theft has increased steadily over the past three years. Indeed, according to statistics compiled by the Federal Trade Commission, more than 160,000 U.S. citizens were victims of ID theft in 2002, and roughly 300,000 people have had their identities stolen since 2000.
Help may be on the way, however. According to the report, new technologies and geopolitical forces will help U.S. consumer lenders justify greater investments in the infrastructures needed to combat this complex type of fraud. Among the other findings of the study:
* The best way for financial institutions to combat losses from identity theft is to prevent a stolen identity from being used in an initial loan application process. Yet, the patterns of identity theft are often random and unpredictable.
* As a result, many lenders have been unable to justify the expense of implementing sophisticated technologies to authenticate a person's identity at point-of-sale-even with the much-publicized rising exposure from compromised internal databases.
* When it comes to identity theft, the Internet and other self-service channels can fuel both the problem and the solution. These channels have markedly increased the incidences of credit card fraud and the footprint of identity theft. Yet the Web, with its capability to link partners and move information quickly and cost-effectively, has proven a strong ally for technology vendors providing new identity verification solutions.
* Geopolitical forces are also playing an important role in helping lenders take key steps in fraud prevention. While the purpose of the USA PATRIOT Act is to prevent terrorist financing, one by-product is the tightening of credential review for new and existing accounts - particularly around establishing standards for verifying customer identification when an account is opened. Technology solutions that provide additional identity fraud coverage while conforming to the tenets of the USA PATRIOT ACT are logical choices for lenders to explore.
"Lenders have always been willing to accept a certain amount of risk," said Christine Pratt, a senior analyst in the TowerGroup Consumer Credit practice and author of the research, "and fraud losses, if they're not actively rising, have been an area of complacency. Periodically, though, it's critical that lenders revisit their assumptions on the fraud issue - and given the current potential economic and geopolitical impact on their bottom line, now is the time."
Pratt noted that emerging products using less costly Web services can be packaged with existing fraud or compliance tools to help make return on investment less elusive for lenders.
"Financial services institutions should take a strategic, enterprise-wide approach to implementing technology solutions to deal with fraud, and identity theft in particular," Pratt said. "Ultimately, the emergence of an industry initiative or consortium that could link key information databases, perhaps in partnership with one or all of the U.S. credit bureaus, could produce the greatest payback for the lending community."
For more information on this report, visit TowerGroup at www.towergroup.com.
This article originally appeared in Bank Systems & Technology eNEWS,a weekly e-mail newsletter. To order a free subscription, click here:www.submag.com/sub/by?tc=1&wp=wpdly1&pk=WMNE