Navigating New Fraud Minefields

How many times have you heard: "We're a PCS carrier, so we aren't concerned with fraud" or "We're digital, so we won't have a fraud problem"?

Some digital cellular and PCS carriers have been operating under a myth that voice privacy through digital encryption is synonymous with security from fraud threats. Unfortunately, cloning is not the only form of fraud.

It seems that carriers that are struggling with today's financial and competitive pressures have forgotten fraud-management lessons of the past. Perhaps a trip down memory lane is in order.

The year is 1988. Competition in the cellular business is fierce. Companies bid aggressively to attract new distribution outlets. Equipment prices are subsidized heavily. Marketing organizations are pressured to bring on as many customers as possible.

Through this new growth wave, cellular carriers from coast to coast are discovering some unsettling trends in their financial results. Bad debts are creeping up. The creep is accompanied by a dramatic rise in subscriber-acquisition costs. Big commission dollars are paid for subscriber activations that generate little or no revenue.

Some carriers crack down. They institute commission-chargeback rules. They deploy credit-scoring systems to screen for deadbeat accounts. Yet, bad debt rates continue to escalate.

The CFO exclaims in his staff meeting, "How can this be? We put in a credit-scoring system and a dozen new collectors. What's going on?"

Now, it is 1998. It's deja vu. PCS and cellular marketers are pressured to bring on subscribers as fast as possible.

The marketing VP says: "Customers can buy the phone at retail and activate it through an 800 number. No signed contracts, no photo IDs. If they can't pass credit, we'll give them prepaid. We will eliminate all barriers. We are digital PCS, and we have no fraud."

Cellular carriers respond: "So are we, and we don't have fraud either. Authentication and RF fingerprinting have snuffed it. Fraud is down 75%."

The painful lessons brought to bear by subscription fraud were forced on cellular carriers during the 1980s and 1990s. They were forced to navigate a pathway through a fraud minefield.

The subscription-fraud losses (and associated commissions dollars paid on fraud accounts) during the mid-1980s and early 1990s were nearly as impressive as recent cloning losses.

Remember the adage, "Those who forget the past are doomed to repeat it?" We already are seeing the fallout from a new wave of fraud. Subscription-fraud levels are rising in all major markets. The success of cellular anti-cloning technologies against home cloning is driving some crooks back to their subscription-fraud roots. (Most elect to simply begin using roaming clone numbers.) Loose screening measures (photo ID validation, signed contracts) are attracting serious organized subscription-fraud activity to attack the most vulnerable targets -- carriers who activated service via 1-800 numbers.

If you think that you are immune to fraud because you have digital, you had better think again. You can't eradicate fraud. You can, however, control it. First, acknowledge the threat, and evaluate your processes and procedures. Then apply resources to assess and minimize your exposure. Otherwise, you'll find yourself repeating mistakes of the past. And we do not need to walk through that minefield again.