The web is undoubtedly a shopper's paradise, while for brands it provides a vast pool of potential customers who are unreachable by any other means. The flipside, however, is that online, it is harder to establish who is a good customer and who isn't.
Credit data has long been the answer, playing a key role in identity verification and helping companies make informed decisions on who to provide credit to, or avoid. 'It is one of the safest ways to ascertain someone's identity. With it, you can investigate not only someone's current status, but also credit history, as well as associates, such as who they share their mortgage with,' says Chris Sherlock, director of marketing services at Equifax, which, alongside Callcredit and Experian, is one of the UK's three credit-reference agencies and providers of credit data.
However, lenders can receive tens of thousands of applications a week, and more than half of the UK population now shops online (52.42% of the population in December 2010, according to the British Population Survey). This increase in online activity, combined with the UK's ongoing economic uncertainty, has created some challenging problems for businesses, which credit data alone cannot solve. As a result, they are seeking additional resources.
While credit data reveals whether someone has been financially responsible in the past, there is a growing realisation that this does not always reflect ability or intention to pay in the future. 'Lenders tend to use the past to predict the future,' explains Nick Evans, head of customer management at Experian. 'Prior to 2008, when we were in a more stable environment, this was a good indicator. Now, however, given the past few years, it has become less accurate.'
With more people seeking credit online, along with reduced availability of regular credit and rising levels of fraud, making the right decision is ever-more critical for businesses, and it has to be done fast enough to stop potential customers going elsewhere.
'The customer experience has to be very slick online,' says John Lord, managing director of GB Group, which specialises in identity verification. 'If a consumer does not get the green light quickly, they will move on - and on the internet, they are only two clicks away from the competition.'
To enable the quick processing of high volumes of orders and credit applications, systems that integrate with the online application process and conduct credit and identity checks in the blink of an eye are a necessity, according to John Dobson, chief executive of financial-services website Credit Jungle and co-founder of Callcredit.
'Automated verification, scoring and decision-making is the name of the game, and credit reference data has a major part to play,' he says. 'Automated links are available to credit-reference agencies to validate a person's identity and verify bank details.'
Equifax, Experian and Callcredit all offer ID verification services, such as Callcredit's CallValidate and Experian's Identity IQ, as do specialist providers such as GB Group.
Nonetheless, tackling fraud is a major issue for brands operating online. First-party fraud, where individuals falsify details to gain services to which they are not entitled, is becoming increasingly common.
'A growing number of people are able to pay for things but have no intention of doing so, know where they'll leave their digital footprint and where not, and how to avoid comeback for their actions,' warns James Middlehurst, director of payment intent prediction specialist Fraudscreen.
This is echoed by Steve Devine, chairman of UK protection markets association Protect and marketing director of insurance agency Compass Underwriting. 'Fraud checks stop a lot of applications, but we are seeing more adept fraudsters who leave no trail. This is a step change,' he says. 'Insurance was a must-have, but people don't necessarily think like that any more.'
According to Experian, 56% of fraud detected last year was first-party, up from 39% in 2009; it now accounts for more than half of fraud attempted against credit and other financial-service providers.
However, first-party fraud is particularly hard to tackle because no provable crime has been committed - commonly, a name or address might be slightly different, or an item 'lost in the post'. As a result, it doesn't show up on a credit report, particularly as it is generally used to obtain goods that do not require a credit agreement to be taken out, such as mobile phones and clothes.
Consequently, businesses need to learn to avoid fraud in the first place. This is where a service such as Fraudscreen comes in. Its database, containing details of the payment behaviour of 17m people, was created by companies collating their information in a blind data silo. It can be used to establish an individual's intention to pay in less than one second.
Data-pooling is gaining popularity in some markets as brands realise the benefits this can have in tackling fraud. Equifax has developed a closed user group fraud database for its telecommunications customers, for whom first-party fraud is a particular problem. It enables them to share information on 'no intention to pay' fraud. 'Incidences of fraudsters hopping from one provider to another have dropped (as a result),' says Sherlock. 'A lot of brands don't have the capability to find fraudsters, which is where preventative measures can help.'
Last year, Equifax also launched Credit Communities, a real-time tool that allows members to add and share data on customers' account behaviour, including payment terms, County Court Judgments, stopped or bounced cheques, bankruptcy, opened accounts and increased credit limits.
Expanding resource pool
In the payday lending market, which has recorded a dramatic rise in applications as a result of the curtailed availability of credit elsewhere, Credit Jungle is creating a database of individuals with a record of a fraudulent or bad debt outcome, which will send a real-time alert to a payday lender when someone on its list applies for a loan.
'Payday lenders are contributing all their bad-outcome data to this,' says Dobson. 'When operational, this will effectively be another suppression file that enables lenders to make an informed decision.'
Deciding an applicant's creditworthiness has become more of a challenge as the economic climate has resulted in a rise in the number of formerly credit-worthy people becoming unable to pay. As a result, more brands are bringing wealth and affordability data into the mix, while using utilities and rent data is also on the horizon. Experian, for one, is currently investigating rental data as an additional resource.
Modelling and credit-scoring services, such as income models and affordability and over-indebtedness scores, enable users to compare risk scores with actual income to predict how well an applicant will be able to afford repayments in the near future.
'A good credit score doesn't show whether someone is earning enough to take on credit,' says John Cannon, Callcredit's head of product strategy, financial crime. 'By looking at income and the ability of someone to afford a certain amount of debt, we can predict how well an individual will be able to afford repayments over the next few months.'
Even in an innovative market, however, one thing is clear: no one sees fraud as a totally beatable problem. The push now, through the addition of new data sources, data pooling and other techniques and products, is toward avoidance.
'Chasing crooks is a waste of time,' concludes Middlehurst. 'Now, it's all about fraud prevention.'
CASE STUDY - MORE TH>N AND RSA ECHOICE
More than 50% of More Th>n's and RSA echoice's sales are conducted online. With millions of quotes generated through multiple price-comparison sites each month, as well as high volumes of traffic coming through their own websites, the need for strong and reliable sources of credit data is of unparalleled importance, says Pete Markey, chief marketing officer at RSA Insurance Group.
The Group works closely with its providers to ensure the data it uses is the most rounded and up to date as possible. 'Key indicators like geographical area need ongoing review and refinement, and the need to more frequently review and update models has become increasingly important,' adds Markey.
With so many quotes being generated by price-comparison sites each month, responding quickly to consumers is a major challenge, while fraud is also an issue, as Markey acknowledges. 'When millions of quotes are being generated via price-comparison aggregators' sites every month, speed of response to consumers is critical,' he says. 'This means insurers who choose to credit score need to ensure a timely response, otherwise this could result in lost business. Fraud has been a key theme for motor insurers this year and credit scoring, enhanced with other data, is being used to clamp down on fraud as early as possible in the application process.'
CREDIT DATA NEED TO KNOW
What credit data includes:
- Electoral Roll information verifying name and address.
- Information on past and existing credit accounts.
- Credit-card behaviour.
- Shared financial commitments.
- County Court Judgments or decrees.
- Current account overdraft balances.
- Student loans.
What it doesn't include:
- Third-party financial information for associates with whom the individual shares no financial commitment.
- Information on savings accounts.
- Fines, such as traffic offence penalties.
- Child Support Agency maintenance orders.
- Medical history.
- Criminal records.