Nautilus Sci/Tech News
May 24, 2008
It is, without a doubt, one of the great marketing stunts in recent memory. Two years ago, Todd Davis decided to put his Social Security number in the television commercials and print advertisements for LifeLock, the company he helped found. For a fee of about $10 a month, LifeLock offers what it calls a “proven solution” that prevents its customers from becoming victims of identity theft and fraud.
By putting those nine digits on public display, Mr. Davis was trying to show the world how confident he was in LifeLock’s service. And it worked. Today, he has just over one million customers. In January, Goldman Sachs led a $25 million round of financing for the company. Last week, Google’s chief financial officer joined its board.
But Mr. Davis’s stunt also amounted to a dare, and one man in Texas has already succeeded in getting a payday loan in his name.
Regulators and lawyers have the company in their sights, too. The state of Oklahoma accused LifeLock of selling insurance without proper certification. New York City has announced its intention to sue the company. Class-action lawyers have filed federal and state lawsuits, charging deceptive business practices and fraudulent advertising, among other things.
All this raises a couple of basic questions: What are the chances that an identity thief can do you real harm? And if you feel vulnerable, do you need to spend $100 or more a year to protect yourself?
First, let’s check the odds. The latest Federal Trade Commission statistical survey about identity theft found that 8.3 million American adults, or 3.7 percent of the adult population, were victims in 2005.
But the majority of those people ran into problems as minor as having a thief use their credit card numbers. This type of fraud is annoying, but it rarely costs any money as long you notice it and let the card company know.
The scarier situation is something called new account fraud. Thieves steal your personal information and open credit card and other accounts in your name. When they don’t pay the bills, it is your credit history that is wrecked.
Thankfully, new account fraud is much less common. The Federal Trade Commission survey showed only 1.8 million people, or 0.8 percent of the adult population, had fallen victim to that kind of fraud or to other crimes such as criminals giving an innocent person’s name to an arresting officer or using it to rent an apartment.
As for the trend, the overall number of identity theft crimes appears to be falling. An annual survey by Javelin Strategy and Research shows the number of incidents falling 20.6 percent in the last four years. The research company does expect the incidence of new account fraud to rise in the next five years, but it predicts that the annual dollar amounts will fall.
With the risk fairly low but the pain of falling victim quite high, it is best to think of identity theft and fraud as an illness that you do not want to contract. Early detection is good, but prevention is much better.
That is where LifeLock wants to play. One significant service it offers places a 90-day fraud alert on your credit files with Equifax, Experian and TransUnion, the three biggest companies that track credit histories. You can do this yourself at no charge, though LifeLock renews the alert every 90 days, which is convenient.
If your credit file contains this type of fraud alert, any credit card company, bank or other entity so alerted is supposed to hit the pause button when reviewing most types of credit applications in your name. Then, the company is required to use “reasonable” procedures to make sure the applicant is really you.
And therein lies the hitch. A fraud alert is not a lock for your life at all. “It’s not a red flag, it’s a yellow flag,” says Steve Ely, president of personal information solutions for Equifax. “Fraud alerts do not prevent new account fraud, and it’s a shame that lots of competitors are suggesting that to the public and getting away with it.”
Instead, a fraud alert is more like a burglar alarm. And if the alert repeatedly fires off false alarms, forcing creditors to constantly double-check the identities of LifeLock customers who have never been victims of fraud, it is possible that those credit issuers will pay less attention to them. Experian is so worried about this, along with other issues, that it has filed suit against LifeLock.
Mr. Davis of LifeLock says he does not believe his company is contributing to the degradation of fraud alerts. The deterrent effect of so many alerts, he said, will cause thieves to find some other way to make a living. Sure, he said, fraud alerts make the application process more time-consuming and expensive for creditors. But it would make no sense for them to start ignoring the warning flags. “Go figure that costly expense versus the write-off for laptops and plasmas” that thieves would buy if the alerts did not stop them, he said.
LifeLock also offers a $1 million service guarantee. This sounds like insurance, but it is really just a warranty. LifeLock promises that if there is a defect in its own performance — say, it fails to initiate or reset a fraud alert — it will pay up to $1 million to restore your good name. In practice, Mr. Davis said, the company helps customers who run into trouble even when LifeLock is not at fault. There is no guarantee it will continue to do that, though Mr. Davis says the company’s good name depends on it.
But it is unlikely that LifeLock will ever pay anything near $1 million. It won’t, for instance, cover the difference between the interest rate you will pay if a thief’s activities destroy your credit score and the lower rate you should be getting. It will not pay for lost wages or reimburse you for the time you may need to deal with the issue, though it may hire people to help you. The guarantee, as the company states in its own terms and conditions, is “limited.”
Though LifeLock offers a few other services, they are not enough to make me a buyer, not at this price. I do count myself among the paranoid and prevention-minded, which is why I have a freeze on my credit files. This is one (big) step beyond fraud alerts, since credit freezes lock your files so that no new creditor can get to them. It’s the closest thing to a silver bullet against new account fraud that exists at the moment — unless you live off the grid.
It is also a mild pain. You usually have to pay a small fee to each credit bureau for the freeze and pay for temporary thaws whenever somebody needs to look at your files. And you have to call the agencies with passwords in advance when you do want to grant access. You may need to do this a few times each year.
If you don’t want to spend anything, there is plenty you can do to drop your risk far below the 0.8 percent that the government figures suggest.
Lock your mailbox. Switch from paper bills. Shred confidential mail and credit card pitches. Secure your paper files. Do not carry paper checks or a Social Security card every day, lest you lose them. Be especially meticulous if a relative or others close to you are having financial or substance abuse problems.
