Using Non-Credit Based Identity Proofing to Evaluate Risk by idology

Turning Thin Files into Fat Profits: Using Non-Credit based Identity Proofing to Evaluate Risk

An IDology, Inc. Whitepaper

Turning Thin Files into Fat Profits: Using Non-Credit based Identity Proofing to Evaluate Risk

Overcoming the Credit Challenge of an Under Served Market The use of credit histories has evolved from a simple tool to help financial lenders, such as mortgage companies or credit card issuers, evaluate if a consumer will pay his or her debts, to a full-blown screening tool for all types of businesses to evaluate risk. But what about the 70 million consumers1 who fall outside of the credit system? According to some, the unbanked immigrants and ethnic minorities spending on financial products and services will increase by 94% in the next 4 years.2 With so many people in the United States having little to no credit combined with an expected increase in spending from this market, relying only on credit scores during the decision process, whether it is for a bank loan, new account or purchase order, means your business may be turning down a legitimate customer and missing a real opportunity for revenue. One of the key findings in a report conducted last year by the Political Economic Research Council (PERC) and The Brookings Institution Urban Markets Initiative found that those outside of the credit mainstream have similar risk profiles as those in the mainstream when including nontraditional data in credit assessments.3 In fact, using nontraditional data lowered the rate of serious default by more than 20% among previously unscoreable populations.4 Source: www.CartoonStock.com

1. As reported by the National Credit Reporting Association Inc. in March 2007 2. Global Advertising Strategies research report overview, Financial Services and the Underbanked, http://www.researchandmarkets.com/reportinfo.asp?report_id=297175, April 2005 3. Political and Economic Research Council & The Brookings Institution Urban Markets Initiative, Give Credit Where Credit Is Due: Increasing Access to Affordable Mainstream Credit Using Alternative Data, 2006, p.2 4. Ibid, p.2

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ÂŠ 2007 IDology, Inc.

Turning Thin Files into Fat Profits: Using Non-Credit based Identity Proofing to Evaluate Risk

As Michael Turner, president of PERC says, “While consumer credit-reporting has become a principal means of risk assessment for gaining access to the credit markets, consumers who have little or no information in their credit files – although they may be creditworthy – are actually deemed not creditworthy.”5 Since a high saturation in the banking market among credit-ready consumers exists, financial institutions are looking for new ways to increase market share. One solution is to target the thin file market and offer products and services that will drive more revenue. Fortunately, there is an easier way to evaluate the risk in dealing with this market before sinking too much time and effort into researching the creditworthiness of a consumer through alternative means. This whitepaper will review the challenges involved with identifying the thin file market and demonstrate the role non-credit based identity proofing technologies play in creating more profits within your business.

Understanding the Types of Thin File Consumers As one would guess, the very definition of “thin-file” means there is not a lot of information available to completely understand all the demographics of these consumers. However, there are typically two groups that fall within the thin file category. These are:

• Young People – because people do not start building a credit history until they are 18 or older, young people often do not have credit reports.

• New In Country – our credit system is strictly US based so even if immigrants have a good credit history in another country, it will not move with them here. Other types of consumers with thin files include minorities, lower-income consumers, older widows or divorcees whose credit histories link to their husbands’ names only, retirees without a mortgage, extremely wealthy individuals who pay cash for everything, and people who deliberately do not use or want credit.

5. Steve Bergsman, The Thin-File Problem, Mortgage Banking, March 1, 2007

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Turning Thin Files into Fat Profits: Using Non-Credit based Identity Proofing to Evaluate Risk

In many of these instances, the lack of a credit file does not necessarily indicate a high-risk individual or that someone is attempting to commit fraud using a fabricated identity, although certainly you should evaluate each circumstance carefully.

Moving Beyond Credit-Based Solutions To minimize the risks associated with the thin file market, banks are turning to solutions that fall outside of the credit spectrum such as dynamic identity proofing. Dynamic identity proofing, also called knowledge based authentication (KBA), is used as a higher level of verification in situations where businesses want more confidence that the person they are dealing with is real. KBA is an automatic process used to determine if someone is who they say they are in faceless transactions and works using a series of multiple-choice questions that are developed in real-time based on personal information found in an individual’s file. Because dynamic KBA solutions use questions that are much different from shared secret type of questions (i.e. “What is your mother’s maiden name?” and “What is the name of your favorite pet?”), this solution is very effective in the account origination process. Some KBA solutions, especially those provided by credit bureaus, rely on credit information to generate questions making it difficult to use in the thin file market since limited or no information exists as a foundation to formulate on-the-fly questions. Other providers, such as those from independent solution providers, rely on information found in public data records which include sources for property information, motor vehicles, phone records, professional and personal licenses, and more. Overall there are five key reasons why non-credit based KBA is earning a reputation of helping businesses easily and quickly identify the thin file market and evaluate risk. These are:

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Provides an Uplift in Revenue As discussed earlier, there are several reasons why a person might have a thin file. While there is an elevated risk associated with the thin file market, it is possible that someone with a thin file will be a legitimate, profitable customer. Using a non-credit based KBA system gives businesses a greater opportunity to quickly verify the identity of a thin file consumer and keep him or her quickly moving through the process. The result is faster processing times, higher approvals and ultimately, more revenue.

Turning Thin Files into Fat Profits: Using Non-Credit based Identity Proofing to Evaluate Risk

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Has a Wide Range of Data Sources Non-credit based data is much broader and includes a wide range of data source types which are typically described as “public data records.” A general misconception about the term public data records is that these records are open to the public and easily accessible. The term public in this scenario is used to describe the information that legally comes from the public domain versus credit data. Public data sources include information from property records, driver’s license and motor vehicle registrations to name a few, all of which are not readily available to the public at large and in some instances not available at all.

Prevents Fraud and Identity Theft The first step to determining the creditworthiness of an individual is to establish that the person is real and not an identity thief. Because non-credit based KBA questions are based on “out of wallet” questions which means a wallet thief can not answer questions based on information that is accessed using a wallet, these solutions are very effective at preventing fraud. Using personal history questions allows topics to be presented that date back throughout a consumer’s life and are difficult for someone other than the actual person to answer correctly. Advanced providers of these solutions have considered the guess factor and designed the system to not present the same questions over and over as well as put limitations on how many times a person can try to answer.

Cost Effective When you factor in the level of resources and the amount of time that is required from employees to research the creditworthiness of a customer and the impact this has on productivity, having an automated solution to narrow down the pool of potential customers is a lot more effective and reduces your overall cost of doing business. A non-credit based KBA solution frees up time for your employees to focus on real opportunities as well as improves process inefficiencies. And since most KBA solutions are based on a per-transaction model the ROI is really significant when you evaluate how much value is added to your business.

Turning Thin Files into Fat Profits: Using Non-Credit based Identity Proofing to Evaluate Risk

Improves Customer Satisfaction and Consumer Confidence Using non-credit based questions to test someone’s identity is a lot less intrusive and better accepted among consumers. Remember data breaches and identity theft are two topics heavily covered by the media and are top of mind for consumers. As a result, people are more aware of what personal information is collected and used about them. Since the bottom line fear relates to financial loss, it is easy to see how questions about credit and finances such as “What is your monthly mortgage?” or “What are the last 4 digits on your Visa” can rub consumers wrong and create concern for how this information is being used.

About IDology, Inc. IDology helps drive revenue, decrease costs and prevent fraud by providing real-time technology solutions to proof an individual’s identity and age online, in a call center or through a mobile device, without interrupting the transaction. What is unique is we do this in a way that builds more confidence with your customers – by protecting sensitive data and promoting consumer privacy. Using our ExpectID® solutions, businesses have the ability to easily and quickly escalate proofing requirements based on the initial findings of a search by delivering interactive, multiple choice questions derived from independent sources that prove someone is who they claim to be.

IDology is the only provider to offer an on-demand change management tool that allows client business unit managers to manage and control the entire proofing process without having to rely on internal IT resources or contact IDology’s customer service. For more information, visit www.idology.com or call 866-520-1234.

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