Identity Theft Costs
Identity theft costs to the banking, credit, and financial services industries are truly staggering. The losses take three main forms: direct fraud losses, loss avoidance costs, and indirect costs. Direct fraud losses are losses incurred by these industries when someone creates a false credit account and uses it to purchase goods or services. For banks, these identity theft costs also include fake or forged checks. Loss avoidance costs include staffing or fraud hotlines and consumer education as well as interdiction and investigation of possible fraud. Finally, indirect identity theft costs are borne by these industries as a result of loss of consumer confidence in the system that leads to people opting out of the credit system or even using it less frequently. A survey of banks by the American Banker Association reported that the total fraud losses (including identity theft costs) for commercial banks in the US was $679 million in 1999. Aggregate identity theft costs for the two larges consumer credit associations, MasterCard and Visa, rose from $79 million in 1996 to more than $144 million in 2000, an 43% increase in identity theft costs over the period. While these two associations alone account for almost 75 percent of the credit card market, other general purpose cards such as American Express, Discover, and Diners Club have a significant share. Also excluded are bank-issued credit lines and retail credit losses. The data on identity theft costs for these smaller cards are not readily available, but it is reasonable to assume that the identity theft costs for these cards would be consistent as a percentage of total identity theft costs with those reported by Visa and MasterCard. Fraud prevention and resolution also forces credit card companies and banks to incur costs for fraud departments and dispute resolution services. Again, the dollar values of these services are enormous. While not every dollar spend can be traced directly to identity theft as the underlying crime, many of them can be. Expenses for fraud departments are identity theft costs too. Other identity theft costs incurred by financial institutions and credit providers include increased customer relations expenses as a result of identity fraud and identity theft. While there is no dollar value available, banks and credit card companies are certainly devoting increasing amounts of resources to the assisting of customers who have been victims of identity theft. Banks in particular incur significant identity theft costs in attempts to collect restitution from thieves who use fraud and identity theft to perpetrate their crimes. Finally, these financial institutions pay an opportunity cost when they are victims and when they utilize resources to combat and rectify identity theft. Every dollar spend on these issues is a dollar that cannot be used to extend credit to a legitimate consumer, a lost opportunity for business and for profit. That is the identity theft cost that is most difficult to calculate. |
