Knowledge Based Authentication

Round 1 – Pick your corner

---by Monica Bellflower

There seems to be two viewpoints in the market today about knowledge based authentication: one positive, one negative.  Depending on the corner you choose, you probably view it as either a tool to help reduce identity theft and minimize fraud losses, or a deficiency in the management of risk and the root of all evil.  The opinions on both sides are pretty strong, and biases “for” and “against” run pretty deep.

One of the biggest challenges in discussing knowledge based authentication as part of an organization’s identity theft prevention program, is the perpetual confusion between dynamic out-of-wallet questions and static “secret” questions.  At this point, most people in the industry agree that static secret questions offer little consumer protection.  Answers are easily guessed, or easily researched, and if the questions are preference based (like “what is your favorite book?”) there is a good chance the consumer will fail the authentication session because they forgot the answers or the answers changed over time.

Dynamic knowledge based authentication, on the other hand, presents questions that were not selected by the consumer.  Questions are generated from information known about the consumer – concerning things the true consumer would know and a fraudster most likely wouldn’t know.  The questions posed during knowledge based authentication sessions aren’t designed to “trick” anyone but a fraudster, though a best in class product should offer a number of features and options.  These may allow for flexible configuration of the product and deployment at multiple points of the consumer life cycle without impacting the consumer experience.

The two are as different as night and day.  Do those who consider “secret questions” as knowledge based authentication consider the password portion of the user name and password process as KBA, as well?  If you want to hold to strict logic and definition, one could argue that a password meets the definition for knowledge based authentication, but common sense and practical use cause us to differentiate it, which is exactly what we should do with secret questions – differentiate them from true knowledge based authentication.

Knowledge based authentication can provide strong authentication or be a part of a multifactor authentication environment without a negative impact on the consumer experience.  So, for the record, when we say knowledge based authentication we mean dynamic, out of wallet questions, the kind that are generated “on the fly” and delivered to a consumer via “pop quiz” in a real-time environment; and we think this kind of knowledge based authentication does work.  As part of a risk management strategy, knowledge based authentication has a place within the authentication framework as a component of risk based authentication… and risk based authentication is what it is really all about.

One of the handful of mandatory elements in the Red Flag guidelines, which focus on FACTA Sections 114 and 315, is the implementation of Section 315.  Section 315 provides guidance regarding reasonable policies and procedures that a user of consumer reports must employ when a consumer reporting agency sends the user a notice of address discrepancy. 

A couple of common questions and answers to get us started:

1.  How do the credit reporting agencies display an address discrepancy?

Each credit reporting agency displays an “address discrepancy indicator,” which typically is simply a code in a specified field. Each credit reporting agency uses a different indicator. Experian, for example, supplies an indicator for each displayable address that denotes a match or mismatch to the address supplied upon inquiry.

2.  How do I “form a reasonable belief” that a credit report relates to the consumer for whom it was requested?

Following procedures that you have implemented as a part of your Customer Identification Program (CIP) under the USA PATRIOT Act can and should satisfy this requirement. You also may compare the credit report with information in your own records or information from a third-party source, or you may verify information in the credit report with the consumer directly.

In my last posting, I discussed the value of a risk-based approach to Red Flag compliance.  Foundational to that value is the ability to efficiently and effectively reconcile Red Flag conditions…including addressing discrepancies on a consumer credit report.

Arguably, the biggest Red Flag problem we solve for our clients these days is in responding to identified and detected Red Flag conditions as part of their Identity Theft Prevention Program.  There are many tools available that can detect Red Flag conditions.  The best-in-class solutions, however, are those that not only detect these conditions, but allow for cost-effective and accurate reconciliation of high risk conditions.  Remember, a Red Flag compliant program is one that identifies and detects high risk conditions, responds to the presence of those conditions, and is updated over time as risk and business processes change.

A recent Experian analysis of records containing an address discrepancy on the credit profile showed that the vast majority of these could be positively reconciled (a.k.a. authenticated) via the use of alternate data sources and scores.  Layer on top of a solid decisioning strategy using these elements, the use of consumer-facing knowledge-based authentication questions, and nearly all of that potential referral volume can be passed through automated checks without ever landing in a manual referral queue or call center.  Now that address discrepancies can no longer be ignored, this approach can save your operations team from having to add headcount to respond to this initially detected condition.
 

Address discrepancies aren't the end of the road, but they sure can be a bump in it. One of the handful of mandatory elements in the Red Flag guidelines, which focus on FACTA Sections 114 and 315, is the implementation of Section 315.  Section 315 provides guidance regarding reasonable policies and procedures that a user of consumer reports must employ when a consumer reporting agency sends the user a notice of address discrepancy. 

A couple of common questions and answers to get us started:

1.  How do the credit reporting agencies display an address discrepancy?

Each credit reporting agency displays an “address discrepancy indicator,” which typically is simply a code in a specified field. Each credit reporting agency uses a different indicator. Experian, for example, supplies an indicator for each displayable address that denotes a match or mismatch to the address supplied upon inquiry.

2.  How do I “form a reasonable belief” that a credit report relates to the consumer for whom it was requested?

Following procedures that you have implemented as a part of your Customer Identification Program (CIP) under the USA PATRIOT Act can and should satisfy this requirement. You also may compare the credit report with information in your own records or information from a third-party source, or you may verify information in the credit report with the consumer directly.

In my last posting, I discussed the value of a risk-based approach to Red Flag compliance.  Foundational to that value is the ability to efficiently and effectively reconcile Red Flag conditions…including addressing discrepancies on a consumer credit report.

Arguably, the biggest Red Flag problem we solve for our clients these days is in responding to identified and detected Red Flag conditions as part of their Identity Theft Prevention Program.  There are many tools available that can detect Red Flag conditions.  The best-in-class solutions, however, are those that not only detect these conditions, but allow for cost-effective and accurate reconciliation of high risk conditions.  Remember, a Red Flag compliant program is one that identifies and detects high risk conditions, responds to the presence of those conditions, and is updated over time as risk and business processes change.

A recent Experian analysis of records containing an address discrepancy on the credit profile showed that the vast majority of these could be positively reconciled (a.k.a. authenticated) via the use of alternate data sources and scores.  Layer on top of a solid decisioning strategy using these elements, the use of consumer-facing knowledge-based authentication questions, and nearly all of that potential referral volume can be passed through automated checks without ever landing in a manual referral queue or call center.  Now that address discrepancies can no longer be ignored, this approach can save your operations team from having to add headcount to respond to this initially detected condition.
 

 I’ve talked (sorry, blogged) previously about taking a risk-based approach to reconciling initial Red Flag Rule conditions in your applications, transactions, or accounts.  In short, that risk-based approach incorporates a more holistic view of a consumer in determining overall risk associated with that identity.  This risk can be assessed via an authentication score, alternate data sources and/or verification results.  I also want to point out the potential value of knowledge-based authentication (a.k.a. out-of-wallet questions) in providing an extra level of confidence in progressing a consumer transaction or application in light of an initially detected Red Flag condition.

In Experian’s Fraud and Identity Solutions business, we have some clients who are effectively embedding the use of knowledge-based authentication into their overall Red Flags Identity Theft Prevention Program.  In doing so, they are able to identify the majority of higher risk conditions and transactions and positively authenticate those initiating consumers via a series of interactive questions designed to be more easily answered by a legitimate individual -- and more difficult for a fraudster.  Using knowledge-based authentication can provide the following values to your overall process:

1. Consistency: Utilizing a hosted and standard process can reduce potential subjectivity in decisioning.  Subjectivity is not a friend to examiners or to your bottom line.

2. Measurability: Question performance and reporting allows for ongoing monitoring and optimization of decisioning strategies.  Plus, examiners will appreciate the metrics.

3. Customer Experience: This is a buzzword these days for sure.  Better to place a customer through a handful of interactive questions, than to ask them to fax in documentation --or to take part in a face-to-face authentication.

4. Cost: See the three values above…Plus, a typical knowledge-based authentication session may well be more cost effective from an FTE/manual review perspective.

Now, keep in mind that the use of knowledge-based authentication is certainly a process that should be approved by your internal compliance and legal teams for use in your Red Flags Identity Theft Prevention Program.  That said, with sound decisioning strategies based on authentication question performance in combination with overall authentication results and scores, you can be well-positioned to positively progress the vast majority of consumers into profitable accounts and transactions without incurring undue costs.

One of the handful of mandatory elements in the Red Flag guidelines, which focus on FACTA Sections 114 and 315, is the implementation of Section 315.  Section 315 provides guidance regarding reasonable policies and procedures that a user of consumer reports must employ when a consumer reporting agency sends the user a notice of address discrepancy. 

A couple of common questions and answers to get us started:

1.  How do the credit reporting agencies display an address discrepancy?

Each credit reporting agency displays an “address discrepancy indicator,” which typically is simply a code in a specified field. Each credit reporting agency uses a different indicator. Experian, for example, supplies an indicator for each displayable address that denotes a match or mismatch to the address supplied upon inquiry.

2.  How do I “form a reasonable belief” that a credit report relates to the consumer for whom it was requested?

Following procedures that you have implemented as a part of your Customer Identification Program (CIP) under the USA PATRIOT Act can and should satisfy this requirement. You also may compare the credit report with information in your own records or information from a third-party source, or you may verify information in the credit report with the consumer directly.

In my last posting, I discussed the value of a risk-based approach to Red Flag compliance.  Foundational to that value is the ability to efficiently and effectively reconcile Red Flag conditions…including addressing discrepancies on a consumer credit report.

Arguably, the biggest Red Flag problem we solve for our clients these days is in responding to identified and detected Red Flag conditions as part of their Identity Theft Prevention Program.  There are many tools available that can detect Red Flag conditions.  The best-in-class solutions, however, are those that not only detect these conditions, but allow for cost-effective and accurate reconciliation of high risk conditions.  Remember, a Red Flag compliant program is one that identifies and detects high risk conditions, responds to the presence of those conditions, and is updated over time as risk and business processes change.

A recent Experian analysis of records containing an address discrepancy on the credit profile showed that the vast majority of these could be positively reconciled (a.k.a. authenticated) via the use of alternate data sources and scores.  Layer on top of a solid decisioning strategy using these elements, the use of consumer-facing knowledge-based authentication questions, and nearly all of that potential referral volume can be passed through automated checks without ever landing in a manual referral queue or call center.  Now that address discrepancies can no longer be ignored, this approach can save your operations team from having to add headcount to respond to this initially detected condition.