Analyst: Online ID fraud is hyped; real problem is off-line

One in 25 Americans were affected by all forms of ID fraud last year

Despite incidents such as the $22 million in losses suffered by E-Trade Financial Corp. and TD Ameritrade Holding Corp. from online identity fraudsters, the problem of online identity theft is vastly hyped when compared with its more prevalent off-line equivalent, according to one analyst group.

The two leading online stock brokerages have admitted in recent days that overseas hackers used software to steal personal customer data to access and create trading accounts as part of a stock-fraud scheme.

While keylogging software, phishing e-mails that impersonate official bank messages and hackers who break into customer databases may dominate headlines, more than 90% of identity fraud starts off conventionally, with stolen bank statements, misplaced passwords or other similar means, according to Javelin Strategy & Research.

"An insignificant portion of identity fraud actually starts with the Internet," said James Van Dyke, president of Javelin, who pointed out that many firms still rely on simple security questions such as one's mother's maiden name. "The Internet always grabs the headlines, but it is individuals who are close to the victims, such as family and friends, that are doing most of it," he said.

The Pleasanton, Calif.-based research firm has polled 5,000 consumers by telephone for the past three years. Extrapolating from that sample, Javelin estimates that identity fraud in all its forms resulted in $56.6 billion in losses last year.

While fraudsters often use the Internet to access existing bank, phone or brokerage accounts or to create new ones using stolen details, in only one out of 10 of those incidents did the actual theft of the personal data take place through e-mail or the Web or somewhere else on the Internet, according to Javelin. "No matter how you slice the data, it's really hard to arrive at a scenario where the Internet could be the source of the majority of identity fraud," Van Dyke said.

All told, 4% of Americans were affected by identity fraud in 2005, a statistic that is slowly shrinking, though the value of each fraud incident is growing, Van Dyke said. The total losses attributed to identity fraud has held steady the past three years.

Bank customers in the U.S. are not the most frequent targets of the most common form of online identity theft, phishing attacks. Statistics from antimalware vendor McAfee Inc. show that more than half of all recent phishing attacks involved e-mails from a sender masquerading as VolksBank, a German bank, with another quarter targeting customers of U.K. bank Barclays PLC.

EBay Inc., through its namesake auction site as well as its PayPal financial site, is impersonated in phishing e-mails 14% of the time. Fraudulent e-mails purport to be from Bank of America Corp. and Nationwide Bank 3% and 1.5% of the time, respectively.

Van Dyke argued that U.S. financial institutions, by and large, are taking the right steps to protect themselves and customers from identity fraud.

According to a report released this month, more than half of the 24 leading U.S. financial institutions surveyed met Javelin's criteria for having good policies for detecting identity fraud. That's up from a third that won praise for their efforts in 2005.

Policies that "deputize the customer," such as those that let customers set triggers to receive e-mail or phone alerts when their account status or personal information changes, or that allow them to opt out of receiving paper statements via the mail, aid in customer self-detection and reduce proven risks, Van Dyke said.

Bank of America was ranked the safest bank, followed closely by JP Morgan Chase & Co. Washington Mutual, according to Javelin's "Banking Identity Safety Scorecard."

Bank size does not always correlate with safety, said Van Dyke, pointing to KeyCorp, a large regional bank based in Cleveland. It ranked as the fourth-safest bank. The next five banks, in order, were Fifth Third Bank, Wells Fargo, Marshall & Ilsley Bank, Sun Trust and Citibank.

E-Trade, which said last week that it had lost $18 million to fraud, was ranked 17th. TD Ameritrade, which lost $4 million to identity fraud, was not ranked.

TD Ameritrade's CIO, Jerry Bartlett, agreed that eliminating risk on the consumer side is paramount. The Omaha-based online brokerage offers free downloadable software so customers can scan for and eliminate data snooping programs. It also lets customers set e-mail alerts when money transfers are requested or personal account details are changed.

But Bartlett was unsure whether conventional identity theft really remains a much bigger problem than fraud that begins online. "We know from experience that there is a lot of sharing of user IDs and passwords. And once you begin sharing them and writing them down, you lose control of them, like throwing away personal bills without shredding them first," Bartlett said. "But I'm not sure if regular fraud is an order of magnitude larger than online fraud."

Copyright © 2006 IDG Communications, Inc.

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