Online Banking Gets Bad Rap

Online banking is not getting a fair shake from the public. A growing public view is that using the Internet to handle personal financial transactions puts consumers at greater risk of identity fraud.

A recent report by the Better Business Bureau and the Javelin Strategy & Research Group debunks that misconception.

“People are preoccupied with online risks. Our latest research findings are counter to what public opinion is,” Javelin’s founder and chief analyst, James Van Dyke, told the E-Commerce Times.

That research shows that identity theft occurs more often offline with paper records than it does online. Even more surprising, according to the research, is that identity fraud is done by someone close to the victim in half of the cases where the perpetrator is identified.

Basis for Research

The joint study updates a similar research effort done by Javelin for the Federal Trade Commission’s 2003 Identity Theft Survey Report.

The updated results from the Better Business Bureau study show that fear has unrealistically worsened.

“Our numbers show that fears about online identity fraud may be out of proportion to the relative risk, causing consumers to ignore the most glaring issues,” Van Dyke said.

He emphasized that most instances of identity fraud occur through traditional channels and are paper-based, not Internet-based.

Van Dyke said the current study revisited the same survey questions posed in the FTC research two years ago. The new survey reworded some of the older questions to eliminate ambiguity or unfamiliar terminology.

The Better Business Bureau report by Javelin also added a control group of 4,000 people. That part of the survey was conducted by telephone interviews.

Makeover Needed

“We took the FTC survey and scrutinized the data and focused our new questions on acquiring more details. The phone survey component was very expensive,” Van Dyke said.

The earlier FTC report concluded that the online finance industry needed a makeover. Like any product or service presented to consumers, online banking is all about image. The 2003 report showed that the online finance industry was suffering from an image problem.

The survey questions asked respondents to provide details from the last five years.

That earlier FTC report showed that consumers by an 8 to 1 margin were letting their fears about online identity theft limit their expanded use of online financial services.

One benefit the new study concludes is gained by those who access accounts online is that they can provide earlier detection of crime than those who rely only upon mailed monthly paper statements. So by managing their financial activities online, consumers can actually reduce access to personal information on paper bills and statements.

More Findings

Van Dyke said the latest survey results clearly are taking consumers by surprise.

The survey found that 68.2 percent of the time, online users who became victims of identity theft discovered the fraud themselves.

The survey also found that computer-based theft occurred only 11.6 percent of the time compared to incidents of paper-based identity fraud. Spyware was blamed for half of the electronic crimes.

“The big surprise was the average amount of identity fraud loss detected electronically versus thefts from paper sources,” Van Dyke said.

ID theft victims from electronic sources suffered much lower monetary losses than their offline counterparts.

“This shows that online banking consumers are surprisingly good risk managers. This speaks to how technology is affecting business,” Van Dyke said.

Time Proves an Advantage

The average loss suffered by electronic fraud victims was US$551, the study showed. By comparison, the average monetary loss suffered by non-electronic fraud was $4,543, Van Dyke said.

Thus, offline fraud victims outnumbered online banking consumers by more than 8 to 1.

Meanwhile, as Van Dyke sees it, “Time is money.”

Consumers who conduct and monitor their financial transactions electronically spot fraud much more quickly than those who do not. Consumers who wait for monthly paper statements to arrive in the mail lose valuable time in noticing possible discrepancies, he said.

Top Causes

According to the Javelin and BBB report, the most frequently reported source of information used to commit fraud was a lost or stolen wallet or checkbook.

In cases where the criminal’s identity is known, half of all identity fraud is committed by a family member or relative (32 percent); a friend, neighbor or in-home employee (18 percent); or someone at the victim’s workplace (4 percent).

A complete stranger outside the workplace committed the identity theft in 24 percent of the cases reported by respondents.

Debunking the Skeptics

Despite the rising perception among consumers that online transactions are very risky, this latest study shows results to the contrary. It concludes that identity fraud problems are not worsening. In fact, the total number of victims is declining.

The annual dollar volume of identity fraud (adjusted for inflation) is very similar to results from 2003. That amount is $52.6 billion.

The number of identity fraud victims last year dropped to 9.3 million, from 10.1 million in 2003. Meanwhile, the median value of identity theft crimes remained unchanged at $750. The out-of-pocket cost to identity fraud victims also remained unchanged at $0.

The average time to resolve an identity fraud crime dropped by 15 percent from 33 hours in 2003 to 28 hours in 2004.