The Usefulness of ID Theft Fear

As readers of this blog know, I consider the smoke-to-fire ratio on ID theft to be heavily skewed to smoke. ID theft does occasionally cost consumers real money and cause real headaches, but those occasions are orders of magnitude rarer than popular wisdom would lead you to believe.

The basic truth about ID theft is that it is a form of fraud in which the consumer almost always plays the role innocent bystander rather than victim. Sure, sometimes innocent bystanders get hurt, but the basic idea of ID theft is to trick a financial institution into handing over some cash. Why steal from a consumer when you can steal from a bank? As a great philosopher once said “that’s where the money is.”

One of the reasons that this basic truth is routinely obscured is that perpetuating the Great ID Theft Scare is just so convenient for so many people. The snake oil salesmen at LifeLock and it’s competitors are leading examples, but there are others. Journalists in search of an easy story to write are another.

There are creative entrepreneur types. From FiveCentNickel we get news of a new web-based service that will give you a score that will “assess your risk of identity theft.” It is provided by a company called ID Analytics, which calls itself “the leader in on–demand identity intelligence” and “has been on the forefront of identity scoring since its inception in 2002.” Even I think that’s a little creepy.

And although the primary victims of ID theft, banks, credit card companies, and the like, do not do nearly as much to thwart it as you might expect, they are quite happy to accept free help from frightened consumers. That they do not do everything they can to stop it, by, for example, requiring a user of a credit card to show ID, is simple economics. Any gain they would get from reduced fraud would be smaller than the revenue loss they would get when cranky consumers like me used the card less frequently.

Happily for the card companies, there exist many non-cranky customers who, filled with charity, assist the issuers of plastic in their noble cause by writing “check ID” on their cards. I am sure the banks tear up with gratitude every time they think of these kind souls.

One thing that the card companies do spend time and money on is scanning incoming transactions looking for possible cases of fraud. I’ve been called twice by my card company in the past ten years on this. Once, via the miracle of jet travel, I had managed to charge meals in New York and Paris on the same day. (The woman on the line wasn’t very impressed at my glamorous life when I confirmed this, which was disappointing.) The second time a guy called to ask, in a tone that told me he understood it was a really stupid question, if I had spent several hundred dollars at a Toys R Us in Florida earlier that day. I had not.

I can tolerate once every five years or so as the frequency for these inquiries. I can even find them amusing in a way. Any more and crankiness would kick in.

Happily for the card companies, once again those non-crankies scared of ID theft are willing to help out. According to SmartMoney, several big banks have rolled out a “service” that allows the customer to pitch in and help screen those transactions. The version from Wells Fargo, called Rapid Alert,

sends alerts via text message or email generally within seconds of a flagged transaction, such as an international purchase or one in which the card is not present. Account holders set the criteria for a flag themselves.

I suppose for the true control freak this could be amusing. It also might work as a way to further monitor the movements and actions of a teenaged child, in case 24/7 GPS tracking wasn’t intrusive enough.

But by and large this is simply getting the customer to do some work for free, like convincing supermarket shoppers to scan their own groceries.

However, it may be that this time the banks have gone too far and their erstwhile volunteers are catching on. WalletPop carried a post on this new service asking Do high-tech fraud alerts really help consumers? The post is not as emphatic in answering no as I would like, including the remarkable understatement that “for customers, there’s not much incentive to participate” but it does say no. And that’s a start.

[Photo Andres Rueda]

Credit Cards, Identity Theft | Frank Curmudgeon | April 14, 2010 11:59 am

No Comments

By Tony, April 14, 2010 @ 12:31 pm

Thank you! I have long found it frustrating that consumers are usually portrayed as the victims of identity theft. As you point out, when someone pretends to be you in order to spend money on credit, or steal it from your bank account, they are not stealing from you – they are stealing from the bank or the card company.
By Neil, April 14, 2010 @ 12:51 pm

I’ve actually been converted to scanning my own groceries. I get paid in more free time since it saves me substantial lineup time (even when it’s busy, I never have to wait more than a minute to get to a self-checkout), and I can do it as fast or faster than a “professional”

Likewise, low-frequency fraud alerts save time in the event of fraud. If your card or identity is actually used fraudulently (like your Florida shopping spree), it can be a headache later to prove that his wasn’t you, as the card company tries to get out of footing the bill. On shorter notice, it’s just a quick yes or no. Presumably fraud is also ultimately paid for by the consumer (very indirectly through higher transaction prices leading to higher retail prices), so there is some benefit to “helping out” becoming widespread.

Now, whether the return is worth the effort depends on the frequency of fraud, and the amount of time it would take to correct at a later date, neither of which I am entirely certain of. I do after all still use cashiers if there’s no line.
By Ron, April 14, 2010 @ 2:35 pm

I actually was a victim of ID theft and it isn’t a fun day in the park. My brother knew my SS number, DOB and we have the same initials. He charged several thousand dollars on an AMEX card that he applied for and obtained but I discovered it when AMEX called my house wanting money and I then put a fraud alert on my credit file. He then applied for 3 more cards but was stopped by the fraud alert. Yes, I pressed charges (he got three years probation). Four years previously, he had used my Dad’s ID (they look remarkably similar) and cashed several checks out of my parent’s money market checking account … to the tune of $27,000. They didn’t press charges.

Two years later, it happened again. Only this time it was someone trying to buy a car in my name. The fraud alert was still in effect and I was alerted by my credit monitoring service, which I now use. Ten bucks per month is cheap peace of mind in my book.

If you don’t think someone using your identity to obtain credit makes you a victim, you obviously haven’t walked in these shoes.
By jim, April 14, 2010 @ 3:29 pm

Most ID theft falls into the category of someone stole a credit card # and used it to buy $200 worth of stuff online and the bank takes a $200 loss. There is a significant amount of ID theft where someone steals your SSN, gets your DOB and creates credit cards and gets a HELOC against your house variety which is the most damaging kind of fraud. But thats the worst case scenario and most fraud is less than $500 and the cost to consumer is nothing most of the time.

The FEAR over ID theft is disproportionate to the actual frequency of occurrence and economic impact it has. Insurance fraud likely costs everyone more both directly and indirectly.
By Hibryd, April 15, 2010 @ 2:27 am

Tony & Jim – The bank does NOT take the loss when someone uses a stolen credit card. The merchant does – they’re out the merchandise and the card-issuing bank (though Visa or whatever) takes the money back out of the merchant’s account. If a big company like BofA was actually loosing money on CC fraud, you can be sure there’d be some national system in place to stop and prosecute credit card theft. (I don’t call it ID theft – that term should be saved for those cases when someone gets ahold of your SSN, not just a credit card number.)

I had my credit card information stolen a few months ago. (Probably some online store was hacked.) I had a address where the merchandise had been shipped, but local law enforcement couldn’t do anything because I technically wasn’t out any money and thus wasn’t a victim. The merchant couldn’t press any charges or start any investigations because on a national level I was the one who had my “identity” stolen. So basically, no one could DO anything – even though the merchant had a paper trail and a friggin address – except the feds. I entered the case information into a national system and I’m sure nothing will ever come of it.

Funny enough, I’ve been on the other side of this issue too. Twice I’ve worked in companies where I was on the front line for catching fraudulent credit cards. When someone is ordering 50 of our most expensive item, they didn’t bother to indicate the size or color, and it’s getting shipped to the worst town in the area when the billing address is in another state, ding ding ding, we have a stolen credit card.

It was not easy to report this. I had to call Visa’s/MC’s main number, wait on hold, give them the CC number, get the phone number for the issuing bank, call the issuing bank, spend 5-10 minutes getting through phone trees and waiting on hold some more, explain the situation, they have to call the customer, customer calls them back, then the issuing bank calls ME back and says, yes, we’ve shut down their card.

This whole process would take 20 minutes of my (and thus my company’s) time, and the ONLY reason to do it was as a favor for the original card holder. We were never in danger of being out any money, so I’m sure most companies wouldn’t want their employees to “waste” time like that.
By Dan, April 15, 2010 @ 12:18 pm

Truthfully, those fraud checks are nothing but a pain in my butt. I do a bit of foreign travel, and the last thing I would ever want is my ATM card/Debit Card/Credit Card/Charge Card to be blocked for “suspicious activity.” It would likely take one very expensive call at a very inconvenient time to get the issues resolved.

As one of the posters said, stealing a credit card and making fraudulent transactions is night-and-day different from true identity theft, where someone starts opening accounts in your name… accounts you are none the wiser about until you apply for new credit and get denied because of all the delinquencies and collection items on your account.
By Seth, April 15, 2010 @ 3:19 pm

Hey Man, I love the blog. But why the hostility towards those of us who write ‘check ID’ on our cards? You’ve probably made a comment on it at least half a dozen times but I’m too lazy to reference.. actually http://www.google.com/search?q=%22check+ID%22+site%3Abadmoneyadvice.com&sourceid=ie7&rls=com.microsoft:en-us:IE-SearchBox&ie=&oe=

Anyhoozle, I don’t see a problem with it. I know it can’t legally stop anything, and sometimes I wish they wouldn’t ask (though usually I’m pleased), but is there anything wrong with hoping that the guy who stole your wallet can’t buy merchandise illegally regardless of cost to me?

-Seth
By jim, April 15, 2010 @ 6:30 pm

Looks like who actually pays depends on the situation:

http://www.businessweek.com/technology/content/jun2005/tc20050621_3238_tc024.htm

“Who pays the bill when credit-card fraud occurs depends on how the transaction was made. If it happened “face-to-face” with the cardholder signing in the presence of the merchant, the issuing bank is generally liable. But if it’s a “card-not-present” transaction, such as on the Internet, over the phone, or via mail, the merchant is liable”

I’d also assume that if the retailer didn’t do things properly face to face (like failing to get a signature or something) or took a card that was reported stolen then they’d eat the cost no matter what. My sister has a restaurant and she said they get transactions denied cause the waitress didn’t get a signature.
By Chris, April 15, 2010 @ 8:52 pm

I used to run a small retail shop. We of course accepted credit cards (because it’s financial suicide for most consumer-oriented businesses to NOT take them) and had a few fraudulent transactions. Most were caught before they left due to the same kind of red flags that Hibryd mentioned above. One was outright fraud with a college student using her mom’s card, another was a customer scamming us claiming he never received the merchandise (even though I personally handed it to him). In every case, our merchant account was docked for the money (and some hefty fees) before I was even aware of the chargeback. I had to wait for a letter to arrive in the mail before I even knew which transaction was in question.

The system is HEAVILY skewed toward consumers. Consumers only have to report the charge as fraud and the funds are pulled from the merchant’s account immediately. Merchants are presumed guilty until proven innocent. Challenging an accusation of fraud is expensive and time consuming and not worth it in most cases.

Reality is, as frustrating as those situations were, not taking credit cards would have made the business unprofitable. Merchants have to figure those costs into their cost of doing business, and raise prices accordingly to cover.
By lucho, April 16, 2010 @ 9:18 pm

My Gf is a victim of ID theft, money was not stolen from us, they did manage to get a $200 in goods. It’s costing us countless hours on the phone closing accounts, money on credit monitoring service, and just the fear of more accounts opened and credit score damaged was a big toll on her emotional well being.
And don’t believe simply putting a fraud alert on the credit report will solve anything. One CC company opened a new account anyway, and got charged $200.
By Mattman, April 17, 2010 @ 4:21 pm

Great post, though I personally feel this deemphasizes the danger of ID theft way too much. I personally have had a large number of friends/family affected by ID theft, myself included. It takes so much time & effort to try and clean up, if you can ever clean it up. In one of the worst cases, a coworker of mine had the ID thefts visiting his house daily to steal mail delivered with credit cards, etc. shipped. It can be REALLY frightening stuff and I think people should be far more worried about this topic than this posts suggests. Freeze your credit folks:
http://clarkhoward.com/topics/credit_freeze_states.html
By Tony, August 17, 2010 @ 12:36 pm

Ron:

Technically speaking, the bank was in fact the victim of the fraud. You were the victim of the bank, who attempted to pass on the cost of the fraud to you. It’s as if someone broke in and stole your neighbor’s TV, so they came over and took yours…
By Marsha Killington, Colonial Heights VA, May 14, 2011 @ 9:30 pm

http://www.nytimes.com/2011/05/15/your-money/credit-scores/15credit.html
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