Financial Institutions Need to Tackle Frankenstein Fraud Where It Begins

Synthetic identity fraud – when a fraudster uses a combination of real and fake information to create an entirely new identity – is currently the fastest-growing financial crime in the United States. IDC Financial Insights estimates that annual synthetic identity fraud charge-offs in the United States alone could be as high as $11 billion.

The progressive rise in synthetic identity fraud is likely due to multiple factors, including data breaches, dark web data access and the competitive lending landscape. All of these have created a large pool of data for criminals. And what lies beneath the surface is more monstrous – some might even compare it to Frankenstein. 

These Frankenstein IDs – or synthetic identities – are created by criminals to look like real consumers who gradually build up good credit scores, but are really just fabricated to perpetrate fraud. The fraudsters create the identities by taking elements of information from a real person, such as a Social Security number, and combining these with fake or mismatched information.

According to McKinsey, synthetic identity fraud accounts for up to 15 percent of lender losses each year. It can be very challenging to spot because lenders often cannot distinguish between this type of fraud and bad debt. Synthetic identities are mistakenly routed into collections and recovery processes, and not discovered as fraud for months, if ever.

Because of the unique challenges, we encourage members of the financial services industry to continue to be vigilant in examining and updating their fraud prevention measures often to combat this ever-evolving type of fraud. If we want to make an actual dent in the spread of synthetics, the industry must take preventative measures and tackle it where it begins — at account opening. There are three main steps that we recommend financial services institutions take to ensure they are helping stop synthetic identity fraud in its tracks:

Assess your current fraud risk: Financial institutions need to understand the extent to which they already have fraudulent actors hiding in their account base. For example, adding authorized users to credit card accounts is a legitimate process, but it is often exploited by fraudsters to raise the credibility of a synthetic identity. Fraud prevention partners can help organizations examine their existing portfolios and run analyses to determine the level of risk, flagging some identities as potentially synthetic. An expert partner can also review authentication practices and recommend caps on the number of authorized users allowed per credit card account. With these assessments, a lender can make an informed decision on their comfort level with the associated risk and take appropriate actions. 

Harness the power of data and analytics: It’s critical to combine historical data, digital identifiers and advanced analytics to understand when an identity was first seen, how its credit record was created and what relationships it has with other identities, in order to accurately predict synthetic fraud risk. This is especially powerful when applied to new account openings, where the applicant may be previously unknown to the financial institution. Even in the case of a simple checking or savings account application, a fast, friction-free fraud check can be performed in the background, leveraging powerful analytical models to assess fraud likelihood. Particularly in the case of synthetic identities, the earlier the risk is flagged, the less opportunity the fraudster has to build up the reputation and credit score of the synthetic, thereby limiting his or her ability to “bust out” with a large loan default.

Proactively educate customers on ways to protect against identity theft: Ultimately, protecting consumers’ identities helps to fight identity fraud. Several companies offer tools and monitoring services to help consumers guard against identity theft, receive credit activity and fraud alerts, and even get dark web surveillance. By providing an increased awareness of both identity theft and misuse, these products can play a critical role in preventing the initial creation of synthetics. Financial services companies should proactively reach out to their customer base about the best ways to protect their identity information.

If you find that you are struggling to perform any of these processes internally, do not hesitate to look outward and find experts that are versed in the most effective fraud prevention tools and strategies. Finding a trusted partner that can evaluate your positioning with a critical eye could save you from devastating losses in the future. 

As we move forward on the road to recovery, now is the time for financial institutions to use data, innovative technology and advanced analytics to ensure customer safety and stop fraudsters in their tracks. By addressing this issue at the onset, financial institutions will be able to make a legitimate dent in the creation of synthetic identities and proactively prevent future losses. 


Kathleen Peters is the chief innovation officer for Experian Decision Analytics North America.

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