Customer Profiling and Privacy
Implications for the Finance Industry
Roger Clarke

Principal, Xamax Consultancy Pty Ltd, Canberra

Visiting Fellow, Department of Computer Science, Australian National University

Version of 24 May 1997

© Xamax Consultancy Pty Ltd, 1997

Invited Address to AIC Conference on Customer Profiling for Financial Services, 26-27 May, Sydney

This paper is at http://www.anu.edu.au/people/Roger.Clarke/DV/CustProfFin.html

Abstract

Consumer profiling is a threatening technology, and is dependent for its raw material on the expropriation of personal data.

The public is demonstrating increasing concern about privacy threats, and this is resulting in increasing moves by policy-makers in government and parliaments to impose protections.

Application of consumer profiling by financial services organisations will attract considerable opprobrium. It needs to be undertaken very carefully indeed, within frameworks that reflect, and anticipate, increased privacy regulation by governments, and increased demonstration of privacy-sensitiveness on the part of competitors.

Contents

Introduction

Profiling

Dataveillance and Privacy

Privacy Law and Public Concerns

Privacy Threats in Profiling

Privacy Strategy

Conclusions

References

Introduction

Customer profiling appears to be regarded by marketers as a mainstream technique. This paper examines it from the perspective of the consumer. It concludes that there are enormous dangers to consumers, that the public is increasingly aware of and concerned about those dangers, and that marketers who fail to appreciate the dangers will suffer.

The paper commences with reviews of the concepts of profiling, and of the nature and directions of privacy protection law, policy and practice. It identifies the privacy threats inherent in profiling, and suggests elements of a privacy strategy for organisations currently applying, and considering the application of, customer profiling.

Profiling

The term 'profiling' is used in (at least) two ways:

• Abstract Profiling. This involves the extraction from a large volume of data of an 'abstract profile' of a class of person (e.g. a drug trafficker or a young person likely to attempt suicide); followed by the comparison of a database of personal data about large numbers of people, in order to identify 'suspects' or 'prospects'. This is discussed in the early sections of Clarke (1993); and
• Personal Profiling. This involves the accumulation, acquisition and cross-referencing of data about individuals, possibly combined with geo-demographic data; followed by its use for various micro-marketing purposes. See, for example, Larsen (1992).

This Conference appears to be concerned primarily with the second of the two techniques, and hence this paper focuses largely on that sense of the term.

'Personal Profiling' is capable of being applied in (at least) two ways by financial services organisations:

• Applicant Qualification. This is a long-standing technique whereby:
  • data about applicants for loans are gathered from a variety of sources; and
  • procedures are applied to the assembled data, in order to assess whether the lending institution will advance the loan sought.
• The primary purpose of Applicant Qualification is therefore negative, as a means of disqualifying a person; and
• Consumer Marketing. Although in use for many years in some industry sectors, this appears to have been applied relatively recently in the financial services area.
• It involves the use of data about consumers, gathered from a variety of sources, being used to select targets for promotional activities, and to select the most appropriate alternative promotional materials and channels for each consumer.
• Its primary purpose may be viewed as positive (drawing an opportunity to a consumer's notice) or negative (manipulating a consumer's behaviour).

This paper addresses both of these applications of profiling.

Dataveillance and Privacy

Dataveillance is the systematic use of personal data systems in the investigation or monitoring of the actions or communications of one or more persons.

Personal dataveillance is the surveillance, through their data, of an identified person. In general, a specific reason exists for the investigation or monitoring. Mass dataveillance, on the other hand, is surveillance-through-data of groups of people, usually large groups. In general, the reason for investigation or monitoring is to identify individuals who belong to some particular class of interest to the surveillance organization.

Dataveillance involves replacing expensive monitoring of people, by less expensive monitoring of data about them. Decisions are therefore taken not about a person and their affairs (as once occurred when, for example, bank managers interviewed applicants), but about a 'digital persona', that is used as a substitute for the person Clarke 1994a).

Data surveillance is examined at length in Clarke (1988). A more populist rendition is to be found in Clarke (1994b).

Privacy is the interest that individuals have in sustaining a 'personal space', free from interference by other people and organisations. Privacy protection is most usefully seen as the process of finding appropriate balances between multiple competing interests.

Privacy has the following dimensions:

• privacy of the person. This deals with the integrity of the individual's body. Key issues include compulsory immunisation, blood transfusion, compulsory provision of body tissue and urine samples, and sterilisation;
• privacy of personal behaviour. This relates to all aspects of behaviour, but especially to sensitive aspects, such as sexual preferences and habits, political activities and religious practices, both in private and in public places;
• privacy of personal communications. Individuals claim an interest in being able to communicate among themselves, using various media, without routine monitoring of their communications by other persons or organisations; and
• privacy of personal data. Individuals claim that data about themselves should not be automatically available to other individuals and organisations, and that, even where data is possessed by another party, the individual must be able to exercise a substantial degree of control over that data and its use.

With the close coupling that has occurred between computing and communications during the last 15 years, the last two aspects have become closely linked, and are commonly referred to as 'information privacy'. Information privacy is the interest an individual has in controlling, or at least significantly influencing, the handling of data concerning him or herself. A starting-point to access the substantial literature on information privacy is http://www.anu.edu.au/people/Roger.Clarke/DV/.

The international framework for privacy protection is provided by the OECD Guidelines and the OECD Data Protection Principles (1980). These reflect the expertise and the technologies of a quarter-century ago, and are in serious need of updating. A more modern set of principles is provided by the Australian Privacy Charter (1994).

Salient elements of privacy protective regimes include:

• limitations on data collection;
• openness about policies and practices that relate to personal data;
• access by individuals to personal data about themselves; and
• crucially, limitations on data use and disclosure to the data's original purposes, except where legal authority or consent exist.

Privacy Law and Public Concerns

The present state of privacy law, policy and practice in Australia can be gauged by reference to this author's Current Awareness Service, and the Australasian Privacy Law & Policy Reporter.

Briefly, Australian governments have failed to fulfil the obligations the country entered into when it acceded to the OECD Guidelines well over a decade ago. The Privacy Act 1988 (valuably, but imperfectly) regulates most of the Commonwealth public sector, although not yet the companies to which government I.T. is outsourced.

Parts of the Commonwealth Privacy Act also apply to the private sector, specifically the credit reporting area, and Tax File Numbers. Otherwise, there is no coverage of the private sector.

There is virtually no coverage of State public sectors at all.

The flaws in the present regulatory framework are chronicled in Clarke (1997b).

The nature and extent of public concern about privacy-invasive practices is substantial. The primary sources of information are a series of surveys undertaken by the Privacy Commissioner in 1990-94 (PC 1995), and a recent survey, managed on behalf of MasterCard International by this author, reported on at (Clarke 1997a).

The current position is that many industry associations, large corporations and consultancy groups have joined with privacy advocacy groups in urging action by the Commonwealth and State Governments to substantially improve privacy protections. All parties are agreed that this should take the form of what the Liberal Party very reasonably described as 'co-regulation', i.e. corporate complaint-handling procedures, overlaid by industry association codes and procedures, and backed up by legsilative sanctions.

Recent developments in the privacy arena during the months preceding the writing of this paper have included:

• renegging by the Prime Minister on the Commonwealth Government's election promise to extend privacy regulation to the private sector. This was done in the context of the Small Business Task Force, under the (mistaken) impression that privacy legislation would result in additional impositions on small business;
• substantial reactions by privacy advocates, much-reported by the media, aimed at re-instating the Government's commitment to a co-regulatory approach, including legislation;
• serious public concern about the privacy implications of the Government's outsourcing programme (Dixon 1997);
• the Commonwealth government's acceptance that there is a need for amendments to the Privacy Act to extend it to contractors handling government agency personal data;
• the A.C.T. Government's commitment to legislate protection for health records, in both the public and private sectors (Carnell, 1997) and ACTG (1997); and
• the commencement of an enquiry into privacy by the Queensland Parliament (QP, 1997).

Privacy Threats in Profiling

Abstract profiling involves a search for suspects, and is hence a form of mass dataveillance. The construction and use of personal profiles is, on the other hand, an exercise in personal dataveillance.

There are two levels at which concerns arise:

• general, social impacts, identified in Exhibit 1 below, and discussed in Clarke (1988); and
• specific threats to individuals, identified below, and discussed in Clarke (1993).

Exhibit 1: Real and Potential Dangers of Mass Dataveillance

From: Clarke (1988), p.505

To The Individual

• selective advertising
• arbitrariness
• acontextual data merger
• complexity and incomprehensibility of data
• witch hunts
• ex ante discrimination and guilt prediction
• inversion of the onus of proof
• covert operations
• unknown accusations and accusers
• denial of due process

To Society

• prevailing climate of suspicion
• adversarial relationships
• focus of law enforcement on easily detectable and provable offences
• inequitable application of the law
• decreased respect for the law
• reduction in the meaningfulness of individual actions
• reduction in self-reliance and self-determination
• stultification of originality
• increased tendency to opt out of the official level of society
• weakening of society's moral fibre and cohesion
• destabilisation of the strategic balance of power
• repressive potential for a totalitarian government

Specific threats of profiling include:

• selection of advertising channels and messages based on each consumer's digital persona. To the extent that the digital persona is accurate, complete and up-to-date, this verges on consumer manipulation; and to the extent that it is not, it represents pre-judgement and denial of information;
• increased marketer power over consumers, through limitations on people's access to information about goods and services: "the segmentation and marginalisation of consumer information markets further limits the availability of information necessary for informed consumer choice, while simultaneously increasing consumer dependence upon the direct marketer's tightly managed information stream. The result is a market dominated by sellers ... The wider this information gap, the more difficult it becomes to ensure the equitable and efficient working of the marketplace" (p.536); and
• "the combination of consumer profiling with 'geodemographic clustering' techniques inevitably leads to 'electronic redlining', whereby calls from low-income neighborhoods (identified by their telephone exchange), can be routed to a busy signal, a long queue, or a recorded message suggesting that the desired information service is not presently available" (Novek et al. 1990, p.535).

To consider profiling in isolation, however, would be to rather miss the point. Profiling is just one of a rather large set of inherently privacy-invasive technologies and practices that corporations and government agencies are seeking to impose on people, largely furtively.

Important examples of related privacy-invasive technologies and practices include:

• acquisition of data from so-called 'public registers'. For a discussion, see (Clarke 1997c);
• trading of personal data among organisations, sometimes illegally, sometimes merely in the absence of any laws explicitly precluding it, but generally without the consent of the people whose data is involved;
• caller-ID / calling number identification (CNI);
• data mining;
• inferencing technologies generally.

The combined effect of profiling with these other technologies and practices, is the encouragement of yet more data collection and data-trading. Further information about the large numbers of existing and emergent data trails detailing people's lives is provided in Clarke (1996).

A current example of the 'push' for even greater 'data intensity' in the relationships between consumers and financial services organisations is the intense lobbying being undertaken by the Credit Reference Association of Australia (CRAA) and some of its clients, for so-called 'positive credit reporting'.

The present credit reporting arrangements in Australia are a combination of 'negative reporting' (of such matters as skips, late payers and bankruptcies), supplemented by a trail of all lending organisations that have sought information from the shared database. CRAA argues that all consumer indebtedness should be stored centrally, and made available to every potential lender. The privacy interest is in denial of the creation of any such centralised, or at least logically centralised, register of sensitive personal data, which would be at the mercy of not only financial services organisations, but also all manner of other organisations and individuals.

Privacy Strategy

The privacy-invasiveness of corporations and government agencies has been increasing in leaps and bounds. In parallel with that, public concern has grown enormously, and so has the professionalism, persuaveness and impact of privacy advocacy groups.

Privacy has become an important strategic factor for consumer marketing organisations and government agencies alike. A comprehensive examination of the matter is provided in Clarke (1996). That paper proposes that corporate privacy strategy is essential for any organisation that deals in personal data, and that each organisation's strategy should be based on the following principles:

• a proactive stance;
• an express strategy;
• an articulated plan;
• resourcing; and
• monitoring of performance against the plan.

Conclusions

Consumer profiling is flying in the teeth of the gale of public concern about privacy-invasive practices, and snowballing efforts by advocates and policy-makers to impose regulation on private sector use of personal data.

Organisations applying, and considering the application of, consumer profiling techniques need to seriously consider the nature of their relationships with their customers, and adopt a strategic stance concerning customer privacy.

References
Periodical

Australasian Privacy Law & Policy Reporter (1994-), at http://lexsun.law.uts.edu.au/~graham/PLPR_guide.html#plpr_archive

Papers

ACTG (1997) 'Health Records: Privacy and Access' A.C.T. Government, May 1997

Australian Privacy Charter (1994), at http://www.anu.edu.au/people/Roger.Clarke/DV/PrivacyCharter.html

Carnell K. (1997) 'ACT to Legislate Access to Personal Health Records', Press Release from the A.C.T. Chief Minister, Treasurer and Minister for Health and Community Care, Canberra, 19 May 1997, at http://www.anu.edu.au/people/Roger.Clarke/DV/ACTHlthRecs.html

Clarke R. (1988) 'Information Technology and Dataveillance', Commun. ACM 31,5 (May 1988). Republished in C. Dunlop and R. Kling (Eds.), 'Controversies in Computing', Academic Press, 1991, at http://www.anu.edu.au/people/Roger.Clarke/DV/CACM88.html

Clarke R. (1993) 'Profiling: A Hidden Challenge to the Regulation of Data Surveillance', Journal of Law and Information Science 4,2 (December 1993), at http://www.anu.edu.au/people/Roger.Clarke/DV/PaperProfiling.html. . A shorter version was published as 'Profiling and Its Privacy Implications' Australasian Privacy Law & Policy Reporter 1,6 (November 1994), at http://www.anu.edu.au/people/Roger.Clarke/DV/AbstractProfiling.html

Clarke R.A. (1994a) 'The Digital Persona and Its Application to Data Surveillance' The Information Society 10,2 (June 1994), at http://www.anu.edu.au/people/Roger.Clarke/DV/DigPersona.html

Clarke R. (1994b), 'Dataveillance: Delivering '1984', in Green L. & Guinery R. (Eds.), 'Framing Technology: Society, Choice and Change', Allen & Unwin, Sydney, 1994, at http://www.anu.edu.au/people/Roger.Clarke/DV/PaperPopular.html

Clarke R. (1995) 'Trails in the Sand', at http://www.anu.edu.au/people/Roger.Clarke/DV/Trails.html

Clarke R. (1996) 'Privacy and Dataveillance, and Organisational Strategy', at http://www.anu.edu.au/people/Roger.Clarke/DV/PStrat.html

Clarke R. (1997a) 'What Do People Really Think? MasterCard's Survey of the Australian Public's Attitudes to Privacy', Privacy Law & Policy Report 3,9 (January 1997), at http://www.anu.edu.au/people/Roger.Clarke/DV/MCardSurvey.html

Clarke R. (1997b) 'Flaws in the Glass; Gashes in the Fabric', Invited Address to Symposium on 'The New Privacy Laws', Sydney, 19 February 1997 , at http://www.anu.edu.au/people/Roger.Clarke/DV/Flaws.html

Clarke R. (1997c) 'Privacy and 'Public Registers'', Proc. IIR Conference on Data Protection and Privacy, Sydney, 12-13 May 1997, at http://www.anu.edu.au/people/Roger.Clarke/DV/PublicRegisters.html

Dixon T. (1997) 'Privacy laws: why they're a must for the public good', Opinion Piece, The Sydney Morning Herald, Tuesday April 29, 1997, p.19, at http://www.anu.edu.au/people/Roger.Clarke/DV/Outsourcing.html

Larsen E. (1992) 'The Naked Consumer: How Our Private Lives Become Public Commodities' Henry Holt and Company, New York, 1992

Novek E., Sinha N. & Gandy O. (1990) 'The Value of Your Name' Media, Culture & Society, 12 (1990) 525-543

OECD (1980) 'The OECD Data Protection Principles', Organisation for Economic Cooperation and Development, Paris, 1980, at http://www.anu.edu.au/people/Roger.Clarke/DV/OECDPs.html

PC (1995) 'Community Attitudes to Privacy', Information Paper No. 3, Privacy Commissioner, Human Rights Australia, Sydney, August 1995

QP (1997) 'Privacy in Queensland', Legal, Constitutional and Administrative Review Committee, Issues Paper No. 2, May 1997

Statutes

Privacy Act 1988 (Clth), at http://www.austlii.edu.au/au/legis/cth/num_act/pa1988108

Privacy Amendment Act 1990 (Cth) (re credit reporting), at http://www.austlii.edu.au/au/legis/cth/num_act/paa1990188/

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