What Are the Most Common Types of Identity Fraud?

Cases of identity theft grew 112.8% from 2019 to 2023, costing individuals and businesses billions of dollars annually. As the count of digital transactions rises, the sophistication and frequency of identity fraud do as well. Fraudsters continually evolve their methods, exploiting personal data breaches and vulnerabilities in digital systems to commit a range of fraud. This leads to substantial losses for organizations and customers alike. 

The impacts to organizations aren’t limited to financial losses but could potentially result in other risks, including regulatory fines, higher costs of fraud management and recovery, and reputational damage. As online services and widespread use of digital identities continue to proliferate, it becomes more important for organizations to find ways to better protect sensitive information, better detect and reduce identity fraud, and maintain customer trust in digital transactions.

What’s the annual cost of identity fraud in the United States?

The financial impact of identity fraud in the United States is staggering. Javelin Strategy & Research’s 2023 Identity Fraud Study reported identity fraud scams in the United States resulted in losses of $43 billion in 2022 and impacted 40 million adults. This figure encompasses various forms of identity fraud.

What are the most common types of identity fraud in digital transactions?

Identity frauds can be both broad, impacting all organizations, and unique to specific industries. 

• New account fraud occurs when a fraudster uses stolen or fabricated personal information to open new accounts. This type of fraud often targets financial institutions — with fraudsters opening bank accounts, credit cards or loan applications. They exploit these accounts for financial gain before the victim becomes aware of the activity.

• Account takeover (ATO) fraud involves a fraudster gaining unauthorized access to an existing account. Once they have control, they can change account details, make unauthorized transactions and lock out the rightful owner. This type of fraud is particularly damaging as it often goes undetected until significant losses have occurred. ATO fraud detection requires robust identity verification tools and continuous monitoring.
• Synthetic identity fraud entails a fake identity being created by combining real and fictitious information. For example, fraudsters may use a real Social Security number (often stolen from a minor or deceased person) along with a fake name and birthdate to create a new identity. This synthetic identity is used to build a credit history, eventually leading to fraudulent loans and transactions. Synthetic fraud is challenging to detect as it involves valid data points mixed with fabricated information.
• Card not present (CNP) fraud happens when a fraudster uses stolen credit card information to make online purchases where the physical card is not required. This type of fraud is prevalent in ecommerce and can result in significant financial losses for businesses due to chargebacks and lost merchandise.
• Tax refund fraud is when fraudsters file false tax returns using stolen personal information to claim refunds. Victims often don’t realize their identities have been stolen until they attempt to file their legitimate tax returns. This fraud type highlights the importance of secure identity authentication methods.
• Medical identity theft transpires when fraudsters use someone else's personal information to obtain medical services or insurance benefits. This can lead to inaccurate medical records and significant financial and legal consequences for victims. Protecting medical data with strong identity verification measures is essential to prevent this type of fraud.
• Payment fraud is the unauthorized use of payment methods, such as credit cards or bank account details, to make purchases or transfer funds without the account holder’s consent.
• Shipping fraud happens when fraudsters exploit the shipping process to receive goods without paying or intercept deliveries. Tactics include using stolen credit card information to order goods and shipping them to an alternate address or rerouting shipments to different locations.
• Promotion abuse occurs when individuals or organized groups exploit promotional campaigns, discounts or loyalty programs using false or stolen identities to take advantage of these offers multiple times — or in other ways not permitted by the promotional rules.
• Bonus abuse involves individuals exploiting bonuses offered by companies, typically in online gaming or gambling. Fraudsters create multiple accounts to claim sign-up bonuses or unfairly manipulate gameplay to maximize rewards.
• Gold farming is the term for players using unfair methods (often using bots) to accumulate in-game currency or items to sell them for real money.
• Money mules are people who transfer or move illegally-acquired money on behalf of others — often unwittingly.
• Profile misrepresentation is the creation of false or misleading profiles (for example, using fake photos, fabricated personal information or false credentials), often on social media or dating sites, to deceive others.
• Policy violation is a breach of the terms and conditions of a service provider or platform. This can include using bots to enable or engage in fraudulent activities.

How can organizations combat identity fraud?

Organizations managing a high volume of digital transactions should implement a robust identity verification process as a critical component of combating identity fraud. Identity verification helps ensure individuals are who they claim to be. A more effective way to implement identity verification is to adopt a multilayered approach which may include:

• Digital identity verification: This involves using technology to better confirm an individual's identity through document scanning, biometric checks and database cross-references. These methods help ensure the person is who they claim to be, reducing the risk of fraud.

• Biometric identity verification: Utilizing unique physical characteristics like fingerprints, facial recognition or iris scans, biometric verification adds a layer of security that’s difficult to replicate, better ensuring the authenticity of the user.
• Device intelligence: This process is used to authenticate and help verify the identity of a device being used to access an online service or perform a transaction. Device intelligence helps ensure the device itself is recognized, trusted and not associated with fraudulent activities.

• Document-centric identity proofing: This method verifies the authenticity of government-issued IDs and other documents using technologies like optical character recognition (OCR) and hologram detection to ensure integrity.

• Multi-factor authentication (MFA): Requiring multiple forms of identification, such as passwords, security tokens and biometrics, MFA enhances security by adding layers of verification, making it harder for fraudsters to gain unauthorized access.

• Continuous monitoring and behavioral analysis: Identity verification is an ongoing process. Continuous monitoring of user behavior and transaction history helps detect anomalies that may indicate fraud, enabling quicker responses to potential threats.

The most advanced identity verification services integrate many of these verification methods to provide a more robust means of detecting and reducing identity fraud.