Identity theft is a nasty societal problem, growing worse by the amount of data available online.  But a Bellevue startup believes it may have discovered a way to root out the nuisance. And the solution might just be in your pocket.

Finsphere, which just pulled in $1.75 million in venture capital financing, matches the location of a consumer’s mobile phone with financial transactions occurring at ATMs, banks or retail stores. If the two don’t match up — say your mobile phone is in Seattle, but your financial transactions are occurring in Orlando — Finsphere’s PinPoint service works with banking systems to identify those red flags.

“Your mobile phone is such a personal device now and it is something that people carry with them everywhere, all of the time, that it can end up being synonymous with who you are,” said Michael Buhrmann, the former McCaw Cellular executive who founded Finsphere in 2007. “So, the big idea was: ‘Could we use your mobile phone as a proxy for your identity?”

The first area that Finsphere is attacking is helping consumers and banks deal with credit card fraud. Banks have historically utilized pattern recognition to identify unusual credit card activity. But Buhrmann tells GeekWire that those systems — which use models to recognize fraudulent buying patterns utilized by criminals — don’t work very well.

“The bad guys, which are highly organized billion dollar businesses, try to mimic real buying behavior so it is hard to detect, which is one of the reasons why there is a high false positive ratio in the credit card industry. It is quite a big issue,” said Buhrmann.

Introducing location information to the mix adds another layer of analysis that the banks can utilize to determine if credit card fraud is occurring.

The concept can expand beyond the physical world to the online world as well, picking up on the phone’s location to determine if it is close to the IP address where the online transaction is taking place. That could provide another layer of authentication for online retailers or social networks.

“If somebody changes your profile on a social network unbeknownst to you — and we are monitoring that account — we can then let you know that your profile has been changed and it looks like it has been changed from some place that’s removed from where your cell phone and you are,” he said.

Finsphere has raised a boat load of cash to date, pulling in just over $20 million from Shasta Ventures, Mohr Davidow and Frazier Technology Ventures. The company will likely go out for more financing later this year as it looks to ramp up the service.

Buhrmann — who previously founded @Mobile — sees a very big opportunity ahead.

“If you think about Facebook and Google wanting to be your identity on the Internet. What we want to be is your identity protection or identity security on the Internet and all things digital,” said Buhrmann.

Buhrmann added that the market is very large, noting that he thinks they can help “build a category.”

“It could be as large — and obviously it will take a decade to implement to its full value — but it could be a category as large as text messaging in terms of revenue opportunity,” he said.

Buhrmann  said the most recent venture capital financing was not a “down round,” but he implied that it didn’t come with a steep boost in valuation either. That will come, he said, as the company hits certain customer milestones later this year.

At this point, Finsphere is working with a dozen or so banks on the offering. In fact, when I spoke to Buhrmann this morning, he was in London pitching various financial institutions on the business. Finsphere’s primary competitor — ValidSoft — also is based in the United Kingdom.

Here’s Buhrmann talking more about the concept:

http://www.youtube.com/watch?v=Pcg996u_S2Y

John Cook is co-founder of GeekWire, a Seattle tech news site. Follow on Twitter @geekwirenews.

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