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Combat synthetic identity fraud with the next level of protection

Ron Whyte | Senior Vice President, Group Executive, FIS

March 09, 2020

Synthetic identities are called Frankenstein IDs, because they are cobbled together from identity elements from different sources – not just one poor victim of identity theft. While their purpose is simple – to enable fraudsters to open new bank accounts and lines of credit to steal money – synthetic identity scams are more complex than typical identity fraud.

McKinsey & Company estimates that synthetic identity fraud is the fastest-growing type of financial crime in the United States. Losses from synthetic identity are difficult to distinguish from losses from bad debt. However, in an Aite survey, financial institutions reported losses from $10,000 - $15,000 per verified incident. Gartner projects that first-party fraud and synthetic identity fraud will account for 40 percent of write-offs by 2021, up from 25 percent in 2018.

It’s time for financial institutions to ramp up their methods for detecting potential synthetic identity fraudsters when they first apply for an account or credit.

Why synthetic identity fraud is rising rapidly

In a recently-released paper, the Federal Reserve identifies three main reasons for the boom in synthetic identity theft:

  • The explosion of exposed personally identifiable information (PII) in data breaches provides a wealth of cheap data for fraudsters to prey upon victims, especially children and the elderly who are less likely to access credit information and discover the fraud.
  • Randomizing assignment of Social Security numbers in 2011 eliminated their geographical and chronological significance – thereby reducing their usefulness for identity verification. LexisNexis found the number of new identities first reported by a credit bureau soared since the change – rising by 800 percent in 2015 – far out of sync with population increases.
  • Fraudsters use gaps in credit processing to enable them to pass KYC regulations by making synthetic identities appear valid – for example, by fabricating identity credentials and social media profiles. Fraudsters often apply in person to lend credibility to their identities.

Aite cites two more factors contributing to risk – the loosening of credit standards and EMV migration. When the door closed on fraudsters at point-of-purchase, they didn’t disappear. They just moved to more vulnerable spaces.

Catching the fraudsters requires diligence from the get go

Synthetic identity fraudsters aren’t run-of-the-mill crooks. With the goal of getting the most payback per scam, they take their time to perpetrate crimes. They spend months cultivating fake identities and maximizing their credit line before “busting out.”

Combatting savvy fraudsters requires rigorous interrogation of additional data elements associated with an individual’s profile that go beyond traditional ID verification from the get go. Innovative solutions bring fraud and risk strategies to the next level. For example, the FIS Synthetic Index service provides a real-time alert when elements associated with an identity meet risk conditions that indicate components of an identity are synthetic, stolen or manipulated. As part of a dynamic and comprehensive verification screening, this tool equips financial institutions to reduce fraud losses and avoid high collection expenses associated with chasing bad debt.