San Diego’s ID Analytics Comes Full Circle in $120M Buyout

4/6/12Follow @bvbigelow

Bruce Hansen reminded me of the great startup circle of life when I met him recently at the San Diego headquarters of ID Analytics. We met just a couple of weeks after Tempe, AZ-based LifeLock closed its buyout of ID Analytics in a deal estimated by one industry observer at roughly $120 million.

As I walked into the conference room, Hansen handed me a yellowed copy of the Union-Tribune business section from almost nine years ago. Prominently displayed was a story I’d written about ID Analytics in 2003, when the company was a 15-month-old startup. At that time, identity theft was a relatively new and fast-growing fraud (which many police investigators had never encountered), and ID Analytics was just beginning to market its technology to help detect bogus consumer credit applications.

Nowadays identity theft is considered one of the fastest-growing financial crimes in the U.S., with millions of reported cases each year spurring the growth of a substantial industry that offers identity theft protection and credit account monitoring services. And in the decade since ID Analytics was founded, the company has likewise become a substantial business, raising a total of $45 million in venture capital and growing to more than 130 employees. Hansen says LifeLock plans to keep the company in San Diego, where it will continue to operate as an independent subsidiary of LifeLock.

At the beginning, “We came at it from the perspective that there’s a lot of money being lost by enterprises, because they too were the victims of identity theft, along with consumers,” says Hansen, who was ID Analytics’ founding CEO and longtime chairman. Fraudulent purchases under assumed identities were forcing big financial institutions to write off huge losses on phony credit card purchases, loans, and other credit-based transactions.

“We felt we could bring our heavy duty analytics, à la HNC Software, in conjunction with some innovations around the business model and create a new class of analytic screening tools for that problem,” Hansen says. San Diego’s HNC Software had pioneered the use of data analytics and decision-management software to provide real-time analysis of point-of-sale credit purchases. Hansen was president at HNC (reporting to CEO John Mutch) before FICO (NYSE: FICO), which was then known as Fair Isaacs, acquired the San Diego company in an $810 million deal in April 2002.

Hansen and a handful of others from HNC and elsewhere founded ID Analytics that same year. Their idea was to establish an “ID Network” to pool credit application information from many financial institutions, and provide real-time data analysis as a customer service. “They would contribute their proprietary information to this network, feed it in real time,” he says. “We would embed analytics within this network that would detect patterns of suspicious behavior, and all of the participants in the network would in turn have the benefit of that collective visibility in terms of detecting and preventing fraud.”

The key advantage, Hansen says, is that a big bank like JP Morgan Chase will have lots of data from processing its own credit applications. But it would not know about suspicious activity involving credit card accounts at Citibank, or wireless accounts at AT&T or Sprint. “We did it so the data comes in real time,” Hansen says. “But all that comes out of the network, back to the participants, are analytics, statistics, variables—things that can help them make decisions. But the data stays in the network. So AT&T didn’t have to worry that Sprint would have their data.”

Their unspoken goal, of course, was to replicate the success of HNC Software.

“The very first product we called the ID Score and it’s still one of our most successful products today,” Hansen says. “Virtually every one of our clients buys it, and it’s a three-digit number just like a FICO score, and in our case the higher the number the more risk is associated with your identity.” A big bank processing a million credit card applications a month could set the level of risk it was willing to tolerate—like anything over 700—and refer those accounts for additional investigation.

“These enterprises would get a lot of value out of it,” Hansen says. “A large enterprise would take just the 1 or 2 percent of riskiest identities, based on our score, and they could sift out 40 or 50 percent of all the fraud.” Customers write off the remainder as a cost of doing business, because of the costs associated with addressing them (and in confronting consumers over their potentially fraudulent credit applications).

The analytics applied to the data uses pattern recognition technology to identify fraud.

“The best example starts with a new account—applying for a new credit card with Bank of America, or going into get a cell phone at the Sprint store,” Hansen says. “These enterprises only have a couple of seconds to figure out if these people really are who they say they are. So they send a ping to our network, we would do the analysis in half a second on all the stuff we’ve seen on that identity. If that identity had applied for 12 new credit cards in the past 24 hours, then the likelihood of fraud is a lot higher. Or if the address being used with the application for that credit card has been involved with a dozen prior fraud attempts, then it’s a higher likelihood.”

The system can look at all kinds of variables. It might be that there are multiple addresses for one identity, or the Social Security number doesn’t match the applicant’s date of birth. “If the information is being manipulated and used on a continual basis, we can see it because we are looking across all these companies where these attacks are going on, where one company wouldn’t see it. So that was the germ of the idea, and that ID score was a very successful product.”

After commercializing their ID Network in 2003 (which made ID Analytics an early entrant among companies providing software as a service), Hansen says, “We were selling ID scores to everybody. All the big players weighed in, and of course, the more companies that participated, the better the product worked because the more data we’d get, and the better the product worked, and the better the product worked, the more clients we got. So we kept going around in this virtuous cycle. By 2006, it was pretty clear that we had a winner on our hands.”

Hansen says he’s precluded from naming his customers, but they include the top five credit card issuers, top four wireless carriers, auto lenders, and other big companies.

Yet ID Analytics also began searching in 2006 for ways to diversify its business beyond its one core product. “We built this more ambitious growth strategy to build a whole series of solutions around the network and analytics,” Hansen says. “We also raised $20 million in venture capital to fund that expansion plan. We closed it in May of ’07, and we were glad in ’08 that we did that when we did.”

As a result, Hansen says, “We had enough momentum through these growth initiatives that we grew right through ’08, ’09, and 2010″—despite the disastrous effects of the subprime mortgage crisis on Wall Street. “We grew 25 to 30 percent a year in each one of those years.”

One part of the strategy was to use the company’s database and analytics capabilities to help lenders make better decisions about the credit-worthiness of consumers. “It’s now probably 15 or 20 percent of our business,” Hansen says. “They use our data and analytics to make better credit decisions, and not just better fraud decisions.

“That was a natural for us because all our clients were risk managers,” he adds. “They not only wanted fraud risk tools. They also wanted credit risk tools, and they had a big problem around evaluating credit risk when the dynamics of the world changed over the last two or three years.

The second part of ID Analytics’ growth strategy is where LifeLock weaves into the story.

“We asked ourselves why can’t we help consumers protect themselves from fraud using the same network and the same technology?” Hansen says. So ID Analytics developed the capability to issue a real-time alert whenever a consumer’s identity popped up on the network.

The technology led to a deal with LifeLock in which ID Analytics issues a real-time alert to LifeLock customers whenever they apply for credit. “It’s very different from credit monitoring where you might get your alert a week or two later,” Hansen says. “In this case, if you’re standing in a Best Buy, trying to get a Best Buy credit card, you’d give that personal information and the guy punches it into their point-of-sale system. In about 10 seconds you’ll get a phone call that says, ‘You’re in a Best Buy trying to get a credit card.’ And if it’s not you, and you’re not really at Best Buy, you dial 1-800-Help. Then the case comes back here and we shut it down.”

The partnership was not exclusive, and Hansen says ID Analytics also works with a number of LifeLock rivals. “As time went on, the consumers really liked it, because they felt like they really had some control over their identity with this real-time alert. And the enterprises loved it because it helped them protect against fraud.”

As time went on, Hansen adds, “It became apparent how powerful it was, and there was enough value to consumers that the snowball started rolling.”

Of course, a credit card company or wireless company must be part of the ID Network before ID Analytics can issue an alert to consumers as they apply for credit.  “We don’t have 100 percent coverage,” Hansen says. “But we have enough coverage and pretty deep coverage.”

By 2009, ID Analytics had become fully profitable, and Hansen says, “We never really burned through that $20 million” in venture capital the company had raised from a new investor, Investor Growth Capital (IGC), as well as its existing VCs—Mission Ventures, Canaan Partners, and Trinity Ventures.

I’ve heard that the company’s investors had higher expectations—and that visions of HNC’s $810 million buyout danced in their heads. Still, they’ve built a successful analytics business, which is no mean feat in a decade that seemed to begin and end in financial tech wrecks. And with the LifeLock deal, ID Analytics has completed a full turn in the great startup circle of life.

Bruce V. Bigelow is the editor of Xconomy San Diego. You can e-mail him at bbigelow@xconomy.com or call (619) 669-8788 Follow @bvbigelow

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