Facing Off with Fraud

T he figures are staggering: 1.7 million bad checks written per day and $15 billion in check fraud in 2000, with a 12 to 17 percent rise expected this year. Add in fraudulent credit cards, mortgages and loans, and the total grows to $60 billion.

How many bad checks did your merchants unwittingly take today? And what impact does it have, not just on their business but also on yours?

Check fraud has become a huge issue, and Identico Systems has come up with a powerful new solution - a tactical service called True ID.

It all started in 1996 when someone stole a credit card belonging to Bob Houvener, co-founder of Image Data LLC, which recently changed its name to Identico Systems. He couldn't figure out why the crook hadn't gotten caught when he used it.

Being an engineer, Bob sought to find a solution. He tried different methods to verify identity but quickly realized there was no real way to verify who the person was at the point-of-sale. Believing there had to be a reliable and inexpensive way for merchants to use a product that also was inoffensive to consumers, Houvener searched biometrics and data-based solutions.

Identico Systems' original concept was to acquire databases of people's images from each state's Department of Motor Vehicles through a swipe device at the point-of-sale. But Identico Systems soon discovered that the DMV data itself was rife with fraud - multiple individuals using one driver's license, deceased people's driver's licenses being used, several people on one Social Security number. DMV's screening wasn't as reliable as Identico Systems had hoped.

Then there were political issues. When the media raised the privacy issue of DMV selling its data in certain states, politicians jumped on that bandwagon and made it difficult for outside organizations to secure DMV data for identification purposes.

Identico Systems met those challenges with a complete redesign of its service. Rather than acquiring data from the DMV, Identico Systems acquired it directly from the consumer at the point-of-sale. The result: True ID, an enrollment transaction that scans the consumer's driver's license at the point-of-sale, captures the person's data and stores it in a secure, encrypted database for present and future use.

True ID's loss-prevention services are based on Identico Systems' principle that the most secure and cost-effective method of preventing identity-based fraudulent transactions is through real-time digital image verification at the point-of-service. The True ID services use real-time customer image verification to proactively prevent check, credit card, application and other losses related to identity fraud.

True ID captures all necessary data at the point-of-sale through a small device. All data is encrypted, compressed and digitally signed so that it cannot be read en route. By completely encrypting the entire process, True ID secures the privacy of consumer information. That security can also be seen in True ID's above-industry-standard firewalls as well as comprehensive background checks on all Identico Systems employees who work with this data.

Identico Systems' commitment to security doesn't stop there.

"We make sure the data is extremely secure with strict contractual elements with our merchants," says Larry Gilbert, CEO of Identico Systems. "We do extensive in-person training with merchants during installation. We provide cheat sheets, a procedure guide. We train our trainers so that the process can be perpetuated. We even do follow-ups with our merchants to ensure that they are using the system as approved."

How does all this translate to an actual sale? Follow the process:

+ Merchant subscribers are provided with secure access to True ID at the point-of-service.

+ During a transaction, a customer presents a photo ID.

+ The photo ID is scanned into True ID, encrypted, transmitted to Identico Systems and mapped to the customer's account information.

+ The next time the customer initiates a transaction at any True ID- equipped location, the customer's photo image is retrieved from the database and securely sent back to the point-of-service.

+ The merchant subscriber indicates whether the image matches the customer's actual appearance by pressing a button on the True ID display device.

+ If the image matches, the transaction is completed. If the image does not match, the merchant makes the decision on how to continue the transaction.

True ID works in a simple user- and consumer-friendly process that has been proved to reduce fraud losses with overwhelming consumer acceptance. The Federal Trade Commission says identity theft is the fasting-growing crime in the United States. Identico Systems is combating that crime with True ID.

"Our merchants have found it to be incredibly powerful," says Gilbert. "One chain told us they had suffered a seven-digit loss that year. We helped that merchant turn it into a seven-digit profit in about six months."

According to Identico Systems figures, its merchants have experienced up to an 80 percent reduction in fraud rate with a 50 percent increase in restitution efforts.

With a core competence of being able to verify the consumer quickly, efficiently and unobtrusively at the point-of-sale, Identico Systems offers its services for transaction identification and verification only. If a merchant has a problem transaction and wants to get back a copy of a license, Identico Systems limits that data to an authorized user only.

Authorized users receive a pass code and must be registered with Identico Systems. All clerks at each merchant location also receive PINs. If there is ever a problem with the transaction, Identico Systems can trace it back to the source.

And there can be problems. Improper usage as well non-usage can be addressed. Identico Systems can detect usage patterns that are out of the ordinary by electronically monitoring and analyzing data. That data also can monitor clerk compliance by detecting clerks at busy terminals who skip the True ID process.

Abnormally high requests for transaction reports are another red flag. "We know our merchants and their volume," says Gilbert. "If they ask for a lot of reports, we'll call to find out what's really going on."

How do merchants get these services? ISOs are the key to Identico Systems, according to Gilbert. "We work directly with ISOs to make sure the ISO understands the product, understands it is the only solution to identity fraud that really works," he says.

Identico Systems has an intensive, ISO-structured approach. In-depth interviews are standard operating procedure. Identico Systems makes sure that the merchants to whom ISOs are selling would benefit from True ID.

Identico Systems trains ISOs as well. "We want to make our offering beneficial to ISOs," says Gilbert. "It's probably a bit more involved than ISOs are used to. Ours is a very service-intensive approach to ISOs."

Identico Systems provides ISOs with all the necessary collateral as well as procedure guidelines for sign-ups. Merchants sign directly with Identico Systems. There is a hardware component involved - a scanner device delivered to the merchant on a purchase or lease basis. ISOs receive a piece of that sign-up process. Because Identico Systems charges the merchant for every image scanned or retrieved, ISOs also receive a residual on each image charge as well.

The True ID device is a simple and rugged piece of equipment that requires little, if any, repair. With a 5 x 7 footprint, this five-inch-high scanner was designed to be childproof. Easily connected to the same communication network the merchant uses, the True ID device does not integrate with POS terminals. It is a stand-alone device that hooks in and rides over the merchant network. Identico Systems outsources the manufacture of the True ID terminals to EPE Corporation. Leasing is outsourced as well.

A typical merchant installation and setup costs about $199 per month on lease with an image charge of 15 cents per transaction. Identico Systems asks for a 36-month commitment on the part of the merchant. Between 80 and 90 True ID terminals are deployed nationally. Within the next 12 months, Identico Systems is hoping to sign up about 300 new accounts with 4,000 to 6,000 terminals servicing those accounts . with the help of ISOs, of course!

"By selling a service that solves a serious problem that others don't, ISOs can offer True ID side by side along with other services," says Gilbert, "We give ISOs a step up."

ISOs may recognize that there are other companies attempting to address the fraud problem, but no one is doing it the way Identico Systems is. The technology other companies use is a database approach, trying to match social security numbers or checking account numbers to detect whether the customer is who he or she claims to be.

Then there is the emerging field of biometrics, i.e., thumbprints, eye scans, etc. The main difference between them and Identico Systems is the change from acquiring data in bulk to voluntary data acquisition.

Another difference is the customer service Identico Systems offers. During business hours, customers get an actual person, not a voicemail service. After hours, a live answering service pages Identico Systems staff. The 24/7 response is quick. Identico Systems prides itself on recruiting customer-oriented employees.

"Everyone in the company, whether they are writing code or building product or handling financial matters, must be very customer-oriented," says Gilbert. "That is our primary qualification. The other is innovation."

That innovation is taking Identico Systems to new markets. Its initial focus has been on the food industry, but a quickly emerging market for True ID application is instant credit, especially in-store instant credit apps.

Identico Systems is negotiating with some of the big players, many of whom have third-party credit providers. "Small to midsize business, jewelry stores, office equipment leasing, these are who we are going after," Gilbert says. "The ISOs who serve these markets could really help their customers with our offering."

Identico Systems also is looking to market its wares to government agencies and financial institutions, but its primary focus at this point is still food retailers and customer-service counters that cash payroll checks and issue money orders. As Gilbert puts it, "Anybody that has an identity fraud problem at the point-of-sale, we can help them with that in a very unobtrusive manner."

Identico Systems may be looking to expand, but Gilbert doesn't think the company will become that much larger.

"We plan to work primarily through ISO channels," he says. "We are just getting started in the ISO market, and what we are offering is a powerful way for ISOs to differentiate themselves from their competition by solving a problem for their customers that no one else can.

"The benefit to our ISOs is a substantial up-front fee when we put the system in and a recurring revenue for the length of the contract."

Identico Systems has revenue-sharing agreements for five-year terms of service. According to Gilbert, that service will evolve into other services, and ISOs will have new products to sell.

"We have an evolution path for this product that would ultimately end up with the physical POS terminal being integrated with our capabilities," he says. The terminals would be able to do micro-reading, ID verification, check imaging and swipe reading.

The other area Gilbert sees evolving: As the use of True ID grows and the database expands to large numbers of highly authenticated consumers, there will be access to online transactions as well.

Identico Systems hopes to be able to authenticate online transactions based on in-store verification data. Identico Systems calls it "brick to click and back." Gilbert believes this service will encourage online purchases and provide a tremendous consumer benefit as a way to prevent identity theft on the Internet.

Headquartered in Nashua, N.H., Identico Systems has an in-house staff of 33. Its principal backer is Bill Melton, a well known player in the financial services arena, having been involved with VeriFone, CyberCash and Transaction Network Services, to name just a few. Identico Systems has seven issued and three pending patents on its products.

Why didn't anyone think of creating this product?

As Gilbert puts it, "The idea is so simple, it's a great one. That's the beauty of a great idea - its simplicity. We translated that frustration of identify fraud into a passion that offers effective solutions to businesses and consumers as well.

"We would like to be thought of as the company you come to for identity verification."