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In the next big data breach, crowd-sourcing could find the culprits

Following last year’s theft of credit card data from the retailer Target and this year’s discovery of the Heartbleed bug, it’s probably an understatement to say that the credit-card industry has a problem with data breaches.

In fact, since 2010, at least 62 million credit card records in the US have been stolen via data breaches, according to the Identity Theft Resource Center (ITFC), a non-profit consumer advocacy group. And this problem is not going to go away, at least not without some big reforms to US credit card standards.

For individual customers, protecting oneself can be a challenge. Even though US companies (like Target) have state requirements to report data breaches to consumers, the time frames in which they are required to do so are typically vague. “Most laws use wishy-washy words like ‘reasonable’ time frame,” Beth Givens, director of the Privacy Rights Clearinghouse, told CNBC following the incident at Target.

Companies sometimes prefer to wait until they have confirmed and addressed the breach before breaking the bad news to customers, she said, and law enforcement officials may request delays in notification as they conduct investigations. 

Without timely alerts from companies about breaches, customers are left to rely on their banks or credit card company’s monitoring of unusual activity, or their own daily monitoring of accounts. But it’s far from a foolproof system. That’s the problem that Yaron Samid, the CEO of a personal finance application called Billguard, says his app seeks to address. His company’s app is built around algorithms that notify cardholders of suspicious charges and trace breaches back to their source.

When you log into the app, it gives you a list of transactions, and asks you to confirm if they are legit. You swipe in one direction to verify the charge, or the other to identify the charge as fraudulent. If the charge is problematic, the app lists the number of the bank or credit card issuer, so you can report the problem and make sure it’s addressed. Meanwhile, it takes your swipe data, pools it with other peoples’ fraudulent charge data, and uses an algorithm to sleuth out which company is to blame for the breach.

Banks and credit card companies use similar algorithms to detect fraudulent charges, but their data is typically only collected and shared internally. Billguard, on the other hand, sends a message notifying every other user who shopped at the compromised merchant. “Our number one goal is to bring people real-time transparency,” Samid says. “Because they don’t get it from their banks. Not from merchants, either.”

All this data on how and where people spend their money is potentially lucrative, but Samid says his company has no plan to sell the information as marketing analytics. Instead, he says, he’ll be charging a fee to merchants to review their breach record and award them a certification based on their trustworthiness. However, this is still a few months down the road, so the details aren’t nailed down yet.

For now, the app is available for free on the iPhone, and yesterday Billguard went live on the Google Play store for use on Androids.

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