What is synthetic fraud?
Unlike third-party credit card or bank fraud in which a fraudster steals a real individual’s personal information in order to profit from fraudulent financial transactions, synthetic fraudsters create fictitious consumer identities in order to deceive businesses and financial institutions.
How synthetic fraud works
Fraudsters engage in synthetic fraud by either using a combination of fictional identity elements or creating a fictional identity by combining multiple real identity elements. For example, a fictional identity can be created by combining a stolen Social Security number with a real address which is often a P.O. box.
Scammers will often steal a child or elderly individual's Social Security number because these numbers aren’t as likely to be used actively. Then, over a series of months or years, the criminal can slowly improve their credit profile and score until they make a series of large purchases at once. When these are approved, stop using the identity to apply for credit and start to default on the large purchases or loans.
E-commerce and online retailers eat the cost of synthetic fraud
Synthetic fraud can be especially difficult to detect since there isn’t a real person whose personal information has been stolen. Even when legitimate Social Security numbers are used as part of a synthetic identity, real cardholders may not see any impact on their credit for years.
While synthetic fraud may directly impact individual customers, it can certainly impact online businesses. While banks and credit card companies do cover a certain amount of fraudulent purchases as chargebacks, in many cases, they’ll still demand a merchant pays them back.
Sometimes fraudsters actually “double-dip” by making a purchase with a synthetic identity, then telling the bank or credit card company that the product was defective or never arrived. When the chargeback is filed to the bank, the merchant has to eat the cost — a form of ‘friendly fraud’ that can be even more harmful to merchants.
The most frustrating thing about synthetic fraud is that most e-commerce and online retailers see these events as an issue of nonpayment, where they cannot find the person to follow up on. It may not be immediately clear that fraud has actually occurred.
The cost of synthetic fraud
The cost of synthetic fraud credit card attack averages more than $15,000 per incident. And while it’s difficult to estimate the exact cost of synthetic fraud on e-commerce businesses due to the lack of reliable financial data, the costs will only grow as fraudsters keep developing ways to cheat the system.
How to combat the risks of synthetic fraud
With the risks of synthetic fraud rising for all types of e-commerce, it pays for businesses to figure out if their customers are actually who they say they are, especially if they’re attempting to make a large purchase.
While identity verification is an important step in determining whether a user is who they say they are, additional steps – such as digital verification technology – can help catch synthetic fraud.
Devices, locations and online behavior patterns are harder to impersonate, so an e-commerce fraud solution that’s able to evaluate a user’s digital footprint and compare it to known, normal behaviors is key to fighting synthetic fraud.
Additional layers of protection, especially for large or high-risk transactions, include sending disposable passwords or codes to a verified phone number that a user must confirm before they’re able to complete the purchase.
Effective synthetic fraud models are built to specifically analyze consumer behaviors by uncovering anomalies and suspect patterns in account openings, authorizations and associated trades across all lines of business. This sophisticated technology can:
- Detect synthetic identities at the point of origination — before lending decisions are made
- Remove synthetic identities from prescreen and prequalification programs
- Monitor existing accounts to isolate synthetic identities already in your portfolio, which reduces wasted efforts in back-office collections
- Mitigate the impact of synthetic fraud on key populations, including new-to-credit consumers, recent immigrants and those with damaged credit
Discover how TransUnion can be your partner in the fight against new and emerging types of fraud including synthetic fraud. Complete the form below to contact an e-commerce fraud expert today.