Fraud continues to be a major problem for the cellular/PCS industry. This report addresses the fraud problem, its scope, and the solutions available to fight it. It also provides background information on the various types of fraud, including cloning, subscription fraud, tumbling, and theft. A forecast is provided for each of these types of fraud and for fraud overall.
Furthermore, the report identifies each of the main types of solutions to fraud including personal identification numbers, profiling, RF fingerprinting, authentication, personal verification, frauder databases, prepaid calling cards, and security systems. In addition, it provides descriptions of the solutions available from the key vendors.
Although fraud has declined over the past few years, it is nonetheless a considerable problem for carriers, especially given the increasing competition in the industry and the resulting need to decrease losses.
Authentication and digital systems are reducing cloning and tumbling fraud. Because it is harder to clone phones, fraud perpetrators are turning to subscription fraud, in which they use a false or stolen identity to activate service. Subscription fraud is on the rise and is expected to be the dominant form of fraud over the next five years. This has led to an increase in the number of products available to combat subscription fraud.
As long as there are people, the cellular/PCS fraud problem will not disappear. Although fraud-fighting products combat certain types of fraud and wireless systems are becoming harder to compromise, there will always be someone finding new ways to defraud the system. As fraud-fighting systems become increasingly sophisticated, the way to circumvent them will be through the human side of the equation where there will always be a weak link. This weak link could be a carrier`s disgruntled employee who would be willing to take a payoff for providing information that would enable a fraudster to obtain free service.
Does this mean carriers should give up on fighting fraud? Clearly not. Although fraud will always exist, it is imperative that the carriers continue to fight it. Otherwise, in the long run, they would wind up with few paying subscribers. Even a small decrease in fraud can mean a substantial increase to a carrier`s bottom line.
A few years ago, before the advent of PCS, reducing fraud was not such a big issue. Only a couple of cellular players competed in each market, and most carriers had fairly large profit margins. Over the past two years, competition has skyrocketed. Now, there are an average of six to seven cellular/PCS players in each market, and much of their competition is price based. In this new environment, any financial loss is very significant. This situation has caused losses to fraud to be even more devastating to carriers.
One recent example of a large fraud loss is that which Omnipoint experienced during 2Q98. In this fraud scheme, the members of an international conspiracy signed up for Omnipoint service in the United States using stolen identities. They then took the SIM chips from the handsets and shipped them to Europe. There, they installed the chips into European GSM handsets and used them to rack up incredibly high roaming bills. Because the bills were sent to the United States and a real-time roaming fraud protection system was not used, it took a significant amount of time for the company to realize that there was a problem. By the time Omnipoint realized the problem, it owed $9.6 million to its roaming partners due to the fraudulent calls. Certainly, the $9.6 million was a major fraud loss to the company. In June 1998, after the scheme was stopped, Omnipoint reported fraud expenses of just $55,000 for the month. Worked out on a yearly basis, an estimate of the company`s expected total fraud would be just $660,000. Therefore, the $9.6 million charge was over 14 times the amount that Omnipoint probably expected for the year. Since this incident, Omnipoint claims it has added antifraud software and credit checks to its operations.
Not only has the significance of fraud increased, so has the number of solutions available to combat it. These solutions, in addition to the implementation of digital systems, have reduced fraud considerably over the past five years. Over the next five years, IDC believes fraud will decrease slightly relative to overall service revenues, but will increase in actual dollar terms because of the growth of service revenues overall.
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