FIND THOSE MULES! Catching First Party Fraud in Financial Services
ID Analytics, Inc. (IDA) provides analytical solutions to assess consumer risk management on behalf of telecommunications, banking, e-commerce, finance, and government entities. This cross-industry perspective allows us to create innovative solutions to difficult problems. A thorny wireless industry problem recently came to our attention (which we were successful at solving) that we thought would be interesting to share with you because we know similar challenges exist in the card issuing, financial services, and retail banking industries.
A new and growing problem in the wireless industry is where fraudsters are recruited to go into stores and apply for as many smartphones as possible. The interesting twist is that the fraudster is not using someone else’s identity information; they are actually using their own. They typically have an acceptable credit score and therefore are eligible for the wireless account phones. The consumer then walks out of the store, gets paid a few hundred bucks by a handler who then sells the handsets for a handsome profit, often on the international black market.
The wireless carriers send monthly bills to the consumer which, of course, never get paid. The carrier reports all this to the credit bureaus, but the fraudsters don’t care (or don’t understand the real credit history/credit score consequences.)
At IDA, we refer to this behavior as “first party fraud” because the perpetrator is the victim. The fraudster is using (and abusing) their own valid identity and a relatively good credit history to intentionally defraud the provider. The wireless carriers colorfully observe the relationship between the applicant and the organizer as similar to the relationship between “mules” and “handlers” in other illicit transactions; therefore, the behavior has come to be known as “credit muling.”
Until recently, wireless carriers had been challenged to stop losses from mules as they had no means to distinguish the fraudsters from the millions of other consumers with acceptable credit applying for wireless phones. In a coordinated industry response, IDA gathered data from the top U.S. carriers and turned our analytics team loose on the problem. After grinding away for a few months, IDA successfully created a predictive score intended to stop credit mules from defrauding wireless carriers. It works by predicting the likelihood that an application is an intentional first party fraud attempt by looking for the common application characteristics exhibited by known first party fraudsters. This IDA first party fraud score is currently moving into production for several of the top carriers as a front-line defense against this problem.
We know that first party fraud is also occurring in many other industries. Bankers, shippers, and retailers tell us that they struggle with the same problem—how to distinguish the bad actors from the profitable customers. The essential challenge is figuring out how to identify potential fraudsters without alienating good customers and limiting frustrating “false positives.”
IDA is seeking research participants in the financial services, credit card, or retail banking space who are experiencing persistent “Never Pays” or other first party fraud problems and would be willing to work with us to help solve this tough, cross-industry problem. Participant involvement would be fairly minimal and would simply involve sharing some transactional data about account performance with IDA so that we can tune our solutions to specific industries. IDA would conduct all the analytic analysis to create a predictive score, and we’d potentially work together to validate and test the solution.
IDA is optimistic that if we can coordinate and replicate the same kind of collaborative industry efforts that helped the wireless phone market address this problem, we can also work together to greatly reduce these expensive and growing fraud losses in the financial services, card, and retail banking markets.
If you’re interested in learning more about our first party fraud capabilities, or in participating in an industry study, please contact me at KHillestad@IDAnalytics.com or 858.312.6381.