As lenders make diligent efforts to prevent lending fraud, our new analysis found that the growth in synthetic fraud in credit card originations is slowing. But this doesn’t mean lenders are in the clear – fraud is ever changing, and exposure in auto and personal loans has continued to grow. In fact, outstanding balances of suspected synthetic fraud identities increased between 2016 and 2017, and the number of applications coming from likely synthetic identities has remained at peak levels in 2017 too.
Synthetic fraud involves criminals creating identities comprised of fabricated data elements or a compilation of multiple real identity elements, with the intent to use the synthetic identity to open fraudulent accounts.
We believe there are likely three reasons why synthetic fraud is shifting:
- Card issuers have reduced credit limits at account origination
Card issuers have been leading the charge to reduce synthetic fraud risk. In the age of faceless digital application channels, they’ve adopted solutions designed to capture today’s new and more sophisticated fraud schemes. As a result, we’re seeing card issuers execute prudent risk management strategies, such as reducing the credit limits offered at account origination. Issuers are able to take a risk-based approach and increase credit lines over time to reduce their exposure until a consumer demonstrates good performance, giving the lender greater confidence before extending larger credit lines.
- Synthetic fraudsters have improved their skills and shifted their focus
As card lenders reacted quickly by using savvy fraud prevention and identity management solutions, synthetic fraudsters shifted their focus. Over time, these criminals have improved their skills, allowing them to target more lucrative loan types – auto and personal loans. These loans give fraudsters quicker access to the loan amounts, unlike cards, which require transactions over time.
The growth rate of auto and personal loan balances tied to suspected synthetic identities has outpaced broader industry growth rates. Lenders need to remain vigilant about identifying synthetic fraud and using modern solutions to identify sophisticated types of fraud rather than relying on solutions of the past that are proving to be less effective.
- Market education efforts about synthetic fraud raised awareness
When synthetic fraud first started growing, many lenders were unfamiliar with this type of fraud and unsure about how to capture it at point of origination. For the last two years, lenders have begun to understand the scope of the synthetic fraud problem.
At TransUnion, we’ve focused on educating our customers on the importance of mitigating the growing fraud and identity management risks. Our IDVision suite of solutions, which includes our new IDVision Alerts, provides businesses with a holistic approach to fraud and identity management.
Even with the slowdown in synthetic fraud growth, many lenders have been exposed to suspected synthetic fraud through their earlier originations. It continues to be critical for lenders to incorporate smarter fraud management strategies into their approval process.