People often ask: “why banks require your Social Security Number (SSN) when opening an account?” Your Social Security Number is a unique identifier and acts like a duel edged sword. Your SSN has great utility in bringing together personal data, which is why banks often ask for it. But if the number falls into the wrong hands that same utility presents an identity theft problem.
Over time banks have been trying to move away from non-essential uses of SSN. But essential uses remain, and are here to stay. To best understand the issues we explore:
- The purpose of social security numbers
- Why banks require SSN
- The problems with SSN
- The industry alternatives
The Purpose of Social Security Numbers
Social security numbers are issued by the Federal Government through the Social Security Administration. The government uses your SSN to track wages, determine eligibility for various benefit programs, and collect taxes.
Every U.S. citizen is issued a unique number that remains the same during his or her lifetime.
Three words in that sentence explain the value of the SSN to banks: every, unique, and lifetime.
The federal government encourages every citizen to apply for a social security number. An SSN is needed to get a job, and collect government benefits. This makes the SSN almost universal to every person in the U.S.A. that might like to open a bank account. The exceptions are people not interested in getting a job or collecting benefits, resident aliens, and people who have yet to apply for a number.
The Social Security Administration issues one number per individual. No two people should have the same SSN. This unique number makes it easier for banks to distinguish between people with similar names: John Doe SSN 123-69-9876 is a different person from John Doe SSN 567-56-8765.
The number is almost always unique to an individual. While the government issues only one number per individual, there are so many financial institutions (banks, insurance companies, investment firms, etc.) capturing, storing, and reporting these numbers that errors naturally occur. One person’s identity can be associated with another person’s social security number when a clerical error occurs, and then gets disseminated throughout the financial system.
Across Your Lifetime
Most people apply for a social security number when they are very young, and collect social security benefits when the reach retirement age. The number is used to track your wages over your lifetime, as the benefits formula is based upon life-time earnings, and the amount paid into the system.
While an SSN is intended to span a life-time, most of our remaining personal identifying information may change multiple times: addresses and names.
Changes of Address
The average person moves eleven times over the course of a lifetime. When you change your address the bank may not know that John Doe at 123 Main Street is the same person as John Doe at 456 South Street, etc. A social security number helps keep track of your banking relationship data as your addresses change over time, without creating silos of personal data.
People change their names all the time. A comprehensive, unique number that remains the same over time helps banks determine when the same person has different names.
Sometimes we complete bank paperwork using different names.
- Nicknames are sometimes used instead of full names: John Doe and Jonathon Doe
- Middle names are not consistently used: John Doe and John Michael Doe
- Suffixes are not used consistently: John Doe and John Doe Junior
People often legally change their names. This happens very frequently when women get married. A bank may find instances of several combinations for the same person. A social security number helps them determine if they are dealing with one person with legal name changes, or multiple people with similar names. Consider these examples:
- Jane Doe
- Jane Doe-Smith
- Jane Smith
Why Banks Require Social Security Numbers
Banks need social security numbers because they have assemble data to determine whether to open an account, to better service the account relationship over time, and to comply with government regulations.
Banks need your SSN when opening an account in order to acquire an accurate credit report. Credit bureaus rely heavily on your SSN to compile a complete picture of your credit history. A bank will almost always request a credit report when you are applying for credit as part of its underwriting process. Banks also request consumer reports for checking account applications to help mitigate check fraud.
Cross-Selling Account Relationships
Banks want to cross-sell to their customers at every opportunity. If you have a savings account, they want you to also open a checking account. Once the checking account is set up they will suggest putting over-draft checking in place, which is a form of credit. They may also suggest opening up a credit card, or taking out a mortgage. The list goes on and on.
Social security numbers help banks integrate all of these accounts together around an individual record, and sometimes also a household record. The better their systems are at tying these accounts together, the better they can cross-sell existing customers. Social security numbers help tie all these data together.
Government Reporting Requirements
Banks often have government reporting requirements. Any interest income must be reported to the IRS every year on a 1099 statement. Mortgage interest is also a tax deductible expense and is reported every tax season. Money laundering rules require notices of transactions above a certain size. All these bank reporting requirements need social security numbers.
The Problems of Banks Requiring SSN
Banks are slowly migrating away from requiring social security number for several reasons: identity theft, shortcomings, and alternative identifiers.
The use of SSN by private financial institutions has become pervasive. This makes it easier for a criminal to obtain people’s identity, and provides fertile ground to then perpetrate fraud. Banks are beginning to recognize the potential problems associated with a data breach of files containing SSN along with other personal data.
Banks are also seeing that the SSN is not perfectly comprehensive, unique, or stable over time. Not every applicant provides their number when applying for an account, and foreign nationals often don’t have one. People report their number to so many institutions that errors creep into the system. Over time banks find conflicting and missing SSN data on account records.
Alternatives to SSN
For both of these reasons many database companies have developed alternatives. Experian manages TrueVue as a data integration tool, and Acxiom’s counterpart Abilitec provides similar capabilities. Both provide improved data integration capabilities, without the identity theft risk associated with use of social security number.
Many banks have been trying to minimize the use of social security numbers to essential reasons only. Some have migrated to the new data integration tools. Others have found ways to verify identities without needing SSN when account holders contact customer service.