Microsoft Executive Circle

An End to the Identity Crisis

January, 2005

Biometrics solutions aimed at preventing fraud are already a big business.

In the action movie Minority Report, leading man Tom Cruise has his iris scanned in a store of the future. A virtual store associate then offers him personalized promotions based on his prior shopping preferences. Although this vision is a far cry from our in-store experiences today, biometric solutions are making serious inroads into tackling internal fraud.

Jim Crawford, vice president of Retail Forward Inc. in Columbus, Ohio, sees internal solutions as key to the immediate future of biometric technologies: "Biometrics can be used to verify the identity of employees at the point of sale (POS) and other locations, such as restricted stockrooms. The technology has the power to reduce internal fraud and practices such as ‘buddy punching'—when employees clock in for their absent friends."

The importance of this kind of solution is clear when you consider that employees are responsible for a very significant percentage of retail fraud. In addition, while security guards and technologies exist to minimize customer fraud, no such measures are effective against crimes perpetrated by employees.

Peter Dodd, national reseller manager for EPOS Products at Toshiba TEC Corp. in the U.K., explains that current methods of preventing employee fraud all have inherent security risks: "Retailers who want to reduce employee fraud can choose to use binary or traditional keys, magnetic cards, or buttons on POS devices to identify the store associate on duty. In each case, different opportunities exist for fraud because keys and cards can be replicated or swapped between members of staff."

Retailers are interested in biometrics because the technology eliminates all of these risks. It depends on fingerprints and other biological information, which is always unique to the person involved. In addition, retailers that implement solutions on the employee side no longer need to invest in keys and cards or replace those that are lost or damaged. In addition, they can easily protect access to restricted areas of the store or to sensitive data stored in the back office.

Marek Rejman-Greene of U.K.-based BT Expedite, a retail specialist, explains: "Biometric solutions that reduce employee fraud are already big business in the U.S. The turnover of employees is so great in large stores that retailers need secure solutions to protect against fraud. This means they can accurately determine which cashiers and other staff are working, as well as when and where."

Customer solutions

Customer-facing biometric solutions also have an important role to play in the future of retail, according to Crawford. He predicts that key applications will center on reducing fraud associated with bad checks, credit cards, and debit cards. Indeed, biometric solutions could even become a competitive differentiator for retailers, says Kush Wadhwa, director of European, Middle Eastern, and Asian operations for the International Biometric Group (IBG) in the United Kingdom. "In the right environment," he explains, "biometric solutions can be positioned as something that makes the shopping experience more convenient. In addition, cost savings from reduced fraud can be passed on to the customer. The retail POS is a strong environment for biometrics as a replacement for PIN numbers or cards."

Because verifying the identity of customers and employees using biometrics has great potential to reduce fraud and enrich the shopping experience, many believe this technology will grow significantly in the near future.

IBG, a technology-neutral, vendor-independent provider of biometric services, strategy, and solutions, predicts that revenues from biometrics in the ATM/retail sector will increase from $33.8 million in 2004 to $243.5 million in 2008. In a report on the biometrics market, IBG predicts that ATM/retail will be one of the biometrics industry's largest growth areas, representing 5.2% of global biometrics revenues by 2008. The full report is available at: www.biometricgroup.com/reports/public/market_report.html.

The state of play

This predicted acceleration in deployment of biometric technologies reflects recent advances in technology. Inexpensive biometric solutions that work reliably are already available across a number of retail applications.

Toshiba's Peter Dodd explains, "Retailers can identify employees and customers accurately by scanning a portion of the fingerprint and matching it with another piece of data on record, such as a name. The technology can be used in the same way to identify a group of customers—members of a loyalty scheme, for instance."

The cost of deploying biometric solutions is also falling, for internal as well as customer-facing applications. "Biometric solutions that are used to verify the identity of employees and customers are relatively inexpensive today," explains Wadhwa. "As a result, they are increasingly scalable for retailers that want to deploy them across multiple stores."

Technology challenges

In terms of technology infrastructure, biometric solutions are natural successors to other technologies, such as smartcards, that validate customer identity at the POS. Deadlines for the next generation of POS authentication technologies (known as "Chip and PIN") are set for 2005 in Europe, but the United States is currently less prepared for the move.

In spite of this difference, retailers on both sides of the Atlantic face a number of challenges before they can implement biometric solutions. One key difficulty relates to integration issues arising from disparate IT systems.

Crawford says many retailers still collect data from their POS systems by running one-way dial-up polls. This means it is difficult to access POS data in real time in a way that would be required for biometric authentication.

Wadhwa agrees that biometrics deployments can be complex: "Often, lots of integration work is required to make biometrics work. Retailers must enable information flow from the POS to check authorization and CRM and ERP systems. Achieving this can require a significant initial investment."

As a result of these integration challenges, sophisticated database and middleware technologies are increasingly important. In fact, research from IBG shows middleware to be the fastest-growing technology in the biometrics sector. Worth $48 million in 2003, it is expected to generate revenues of $400 million by 2008.

Privacy issues

Much greater than the technology challenges facing retailers are privacy concerns being aired by consumer groups. Crawford says the success of the technology ultimately depends on how it is presented to customers. Asking for information such as phone numbers without explaining how it will be used, for example, will be damaging to perceptions about the technology. Adds Crawford, "There are groups that object to everything from e-commerce sites to customer loyalty schemes. These are fringe elements that will always have issues with biometrics. On the other hand, around 70% of consumers are already members of loyalty schemes and just want to know how information about them will be used."

Where groups have a moderate approach to biometrics, they can be real partners in the process of implementing solutions that will stand the test of time. However, this depends on retailers' policies governing how information will be used.

"We cannot predict the impact of privacy concerns on the adoption of customer-facing biometric solutions," says Dodd. "What is clear is that a great deal of education will be required. For example, most consumers do not yet realize that these solutions simply match a name to a print stored on file. They do nothing more than current systems that match a magnetic strip with customer names or account details."

Privacy concerns can also be allayed by retailers' approach to handling biometric data. This can be kept in a local system, restricting functionality to a single store. Alternatively, it can be saved on a centralized system, which requires retailers to have solid privacy policies in place.

Wadhwa says, "To allay privacy concerns, retailers have the option to put biometric information on a swipe card that customers take with them. This is then presented at the POS for each transaction, and the identity of the cardholder can be confirmed with a fingerprint. When the only record of a customer's information is retained by that customer, biometrics becomes much less threatening."

Retailers must consider privacy issues carefully before they finalize project plans, according to BT Expedite's Rejman-Greene. This will involve interacting with users and implementing codes of conduct. It will also be a matter of running trials to see how customers react to the technology in a real-world environment.

The ROI test

While handling privacy concerns is critical to the future of biometrics, the genuine test will be whether the technology can deliver a rapid return on investment (ROI). For example, though most agree that biometrics will be deployed widely to reduce internal fraud, many question whether the technology will become ubiquitous at the POS.

Rejman-Greene says, "In the next three to five years, it's unlikely that biometric solutions will be widely implemented at the POS. That's because Chip and PIN is on the way, and this is judged to be an effective solution to tackle retail fraud at present."

So retailers must assess the value of biometric solutions on a case-by-case basis, Wadhwa says. "Stores in low-income, high-fraud areas may benefit from biometrics implementations, while stores in more affluent areas may not." As always in retail, ROI will be the bottom line.