Are Your Customers Real? Synthetic Identities Are Driving Fraud

Proactive strategies for managing customer accounts

How well do your fraud detection tools distinguish a real person from a synthetic identity? With synthetic identity fraud exposure in financial services reaching an all-time-high in 2023, it makes you wonder how many of your customers are real. And while we’re getting a clearer perspective on synthetic identities in lending, it’s likely other industries — including telecommunications, video gaming, online gambling and retail — have thousands of fake customer accounts and don’t even know it.

What’s a synthetic identity?

A synthetic identity combines personal identifiable information (PII) data and made-up particulars to fabricate a person or entity in order to commit a dishonest act for personal or financial gain. It’s a way for a criminal — or more likely criminal syndicates — to steal money and products undetected.

Synthetic identity exposure reaches all-time high

Synthetic identity fraud can be difficult to detect because it looks like real people doing normal things. Fake identities are used by criminals to create new accounts and build credibility in the identities by servicing accounts regularly.

In an industry like telecommunications and technology, synthetic identities result in new account creation fraud tied to installment plans for mobile handsets/devices. In 2021, the Communications Fraud Control Association (CFCA) estimated handset/device-related fraud to be $10.8 Billion or 27% of all fraud losses. Of that total, CFCA estimated $2 billion was related to subscription application fraud.

Criminals use synthetic identities across industries; for example, a fraudster may use a synthetic identity and another person’s good credit to apply for an auto loan. Once the loan is originated, the criminal would make regular monthly payments for a period of time, building a good credit history for their fake identity. Ultimately, they stop making payments and the loan goes into default. But that’s not before they use their good credit history to get a credit card or use installment plans to purchase multiple, high-value mobile devices.

The risk to of synthetic identities to every organization that relies on credit histories to support purchase decisions can be viewed through the exposure to lending institutions — which reached an all-time-high by the end of 2023. TransUnion’s 2024 State of Omnichannel Fraud Report identified $3.1 billion in lender exposure to suspected synthetic identities for US auto loans, credit cards, retail credit cards and unsecured personal loans — a 12% increase since end of 2022.

Cybercriminals increase identity data mining to fuel synthetics

Identity data is being harvested at unprecedented scale to power synthetic identity fraud. Two trends have emerged in the past few years elevating the risk from synthetic identities:

• Data breaches: There were nearly 5,000 data breaches documented in the US in 2023, a 15% increase from 2022  
• Consumer scams: Fifty-four percent of consumers reported they were targeted with online, email, phone call or text messaging fraud attempts during a four-month period in 2023

Synthetic identity — a double threat to telecommunications providers

Any organization that has customers create online accounts is at risk of having synthetic identities on their customer file. More to the point, fake accounts with access to products and services of value present real financial exposure and providers may not understand their potential risk exposure.

Looking at digital fraud last year, synthetic identity fraud was suspected in 6.1% of all risky transactions, growing 21% year over year and 184% since 2019. In fact, synthetic identity fraud was the fastest reported digital fraud in 2023, according to TransUnion’s 2024 State of Omnichannel Fraud.

Globally in telecommunications, 4.5% of all transactions were suspected digital fraud and credit card fraud was the most cited form of fraud. Not only are telecommunications companies at risk of synthetic identities at new account creation with installment plans, but they’re also at risk of credit cards belonging to synthetic identities for full purchases. Either way, handset/devices losses from fraud will mount.

How to reduce exposure to synthetic identity fraud?

To protect their organizations, leaders need to work cross-functionally to enhance fraud detection, and establish procedures for regular account review processes that look for synthetic identities. Here are few strategies to consider.

Create friction-right customer experiences that prioritize identity protection

Protecting against synthetic identities goes hand in hand with demonstrating to real customers your organization is serious about protecting their data. Consumers value trust and safety above all other considerations when deciding to do business with an organization. In fact, 79% of consumers reported commitment to personal data security as the top feature they look for in a company.

The risk of not getting this right is serious. Two-thirds (65%) of consumers reported fraud concerns were the top reason they wouldn’t use a site again, up from 63% in 2022. Half of consumers reported abandoning an online shopping cart due to concerns about fraud and/or security, according to TransUnion’s 2024 State of Omnichannel Fraud Report.

While protecting existing accounts with strong authentication process is important, establishing credibility with customers should start at account creation. Best practices include deploying fraud detection tools and processes that use a risk-based approach with programmed step-up verification to reduce false-positives and improve conversions. These reduce friction for legitimate customers and raise roadblocks to criminals:

• Identity verification for anonymous users
• Digital document verification to support identity proofing
• Device proofing that uses device intelligence, identity and behavior to better predict device risk
• Advanced consumer data searches to verify consumer-supplied data during account opening or applications

Streamline high-risk transaction investigations

Criminals are going to commit fraud, making sophisticated fraud detection strategies imperative. Even so, 5% of all global digital transactions were suspected fraudulent in 2023, with volume of risky transactions increasing 14% from 2022. While consumers don’t like to be inconvenienced, they also value safety and security.

Mitigating false positives is paramount. It’s critical transactions flagged for additional scrutiny and even manual review are processed as quickly as possible.    

Best practices here use consumer intelligence to improve and accelerate investigative actions. These solutions enhance the amount of information an organization gathers on consumers based on the level of risk involved in the transaction. For example, powering know your customer (KYC) processes using public records and credit header data sources to verify identity, contact information, family and business relationships, and physical assets during the identity verification process for new account creation.

Identity proofing is critical to staying ahead of synthetic identity fraud threat

Looking to the future, those hoping to stay ahead of evolving and sophisticated fraud techniques like synthetic identities must prepare their organizations — and customers. Identity data will continue to be weaponized for fraud schemes, and consumers will continue to shy away from perceived online risk.

Winning brands will attract customers by building confidence around transaction security, offering both convenience and protection. Organizations that put identity at the center of their fraud prevention strategies will effectively streamline commerce with friction-right experiences — converting more transactions and keeping synthetic identities off their customer files.

Learn more about combating the rising impacts of synthetic fraud by leveraging actionable intelligence on your accounts and prospects. Check out TransUnion TruValidate^TM and TruLookup^TM solutions.