Between the record number of data breaches in 2017 and the rise in nefarious dark web activity, consumers’ information is more vulnerable than ever. Some public websites sell low cost consumer identity credentials and seasoned tradelines, or even provide instructions for how to build a synthetic identity.
Synthetic fraud has flourished in this environment. Since 2012, inquiries from synthetic fraud have increased at nearly 7% each year. And newly booked accounts from synthetic identities have increased at nearly twice that pace.
As synthetic fraud is changing and growing, there are common misconceptions about this pervasive type of fraud. In this blog series, we will discuss common assumptions, such as:
- Synthetic identities follow the same patterns.
- All synthetic identities were created to amass large amounts of loans and then bust out.
- Synthetic fraud doesn’t represent a big risk if consumers are performing on their loans.
Let’s start with fraudsters following specific behavior patterns as they build credit profiles and charge off.
Often, lenders think all synthetic fraudsters follow the same pattern to build up their credit profile. As a result, many financial institutions build policies based on the synthetic fraud they’ve previously identified in their portfolios.
But synthetic fraud is rarely an exact science, and fraudsters are savvy enough to adjust their strategies frequently to bypass lenders’ outdated identity verification solutions. For instance, fraudsters built an inventory of identities with slower charge-off rates between 2012 and 2014, reaching 10% charge off at 13 months. Starting in 2015, there was an increase in the speed to charge off. By then, synthetic identities were reaching 10% charge off in less than eight months.
Traditionally, lenders have evaluated the synthetic fraud risk in their portfolio by metrics such as 60 days past due in the first six months of a new loan. However, our research shows that many lenders risk missing synthetic fraud instances if they only focus on a first payment default or charge off within six months. In fact, many clever fraudsters are able to hide delinquent accounts, bankruptcies or criminal records to obtain credit products and even property rentals. As the fraudsters gain access to new credit products, their new identities look less synthetic as time goes by.
While some fraudsters are busting out on their loans faster, lenders carry substantial risk from the other synthetic identities that have not yet and may never charge off. Regardless of payment history, these synthetic identities represent legal and compliance risk for lenders.
Lenders need to start by conducting a review of their portfolio to identify potential synthetic identities. Once lenders understand which consumers may be synthetic, they can develop strategies and tactics to investigate accounts and limit exposure. Lenders should also utilize a solution at time of origination to evaluate for likely synthetic identities, reducing their risk in the future.
In the next blog, I’ll discuss how the average charge-off rate for likely synthetic identities remains below 30% in any given year. Many lenders think synthetic identities are built to charge off quickly, but we’ll discuss whether this is a misconception.