Secrets of the digital detectives | Economist.com

Secrets of the digital detectives | Economist.com:

"At insurance companies, banks and telecoms firms, fraud-detection software is used to comb through millions of transactions, looking for patterns and spotting fraudulent activity far more quickly and accurately than any human could. But like human detectives, these software sleuths follow logical rules and combine disparate pieces of data—and there is something curiously fascinating about the way they work.

Consider car insurance.........The staggering number of combinations, each an indication of fraud or legitimacy, underscores the limitations of human analysis. Fraud-detection software, however, can evaluate a vast number of permutations and deliver a fraud-probability score. And such programs are getting better as new claims provide extra statistics that can help tune the computational recipes, or algorithms, used to detect fraud.......

"With an estimated $250m in annual sales, and yearly growth topping 25%, the largest and fastest-growing category of fraud-detection software is that used to spot fraudulent credit-card transactions. According to the Association for Payment Clearing Services, based in London, such software is largely responsible for reducing losses from credit-card fraud in Britain alone from £505m ($925m) in 2004 to £439m ($799m) in 2005. Merchants implementing anti-fraud software for the first time commonly see losses from fraud reduced by half. Such software evaluates many parameters associated with each credit-card transaction, including specific details of the items being purchased (derived from their bar codes), to evaluate the likelihood of foul play in the form of a numerical risk score. Any transactions that score above a certain pre-defined threshold are then denied or challenged."

Comment: I have been suggesting that the digital divide is not access to PCs, but also and perhaps more importantly, use of high end ICT. Fraud detection would seem to be an example, requiring serious computing power to search through huge numbers of records. The Economist points out that the service provides users benefits that more than justify service costs. I suspect that there is also an increase in social capital as a result of having this technology. Those who would commit fraud are deterred, and those who might be victimized are protected. Increasing trust in an economy results in markets working better!