For the last several years, as the global economy flourished, the opportunities created by removing friction and driving growth guided business strategies governing identity and fraud. The amount of profitable business available in a low-friction environment simply outweighed the fraud that could be mitigated with more stringent verification methods.
Now that we’re facing a global crisis, it’s time to reconsider the approach that drove the economic boom that defined that last decade.
Recognizing how economic changes impact fraud
At the highest level, we separate fraud into two types; third party fraud and first party fraud. In simple terms, third party fraud involves the misuse of a real customer’s identity or unauthorized access to a real customer’s accounts or assets. First party fraud involves the use of an identity that the fraudster controls—whether it’s their own identity, a manipulated version of their own identity, or a synthetic identity that they have created.
The important difference in this case is that the methods of finding and stopping third party fraud remain constant even in the event of an economic downturn – establish contact with the owner of the identity and verify whether the events are legitimate. Fraud tactics will evolve, and volumes increase as perpetrators also face pressure to generate income, but at the end of the day, a real person is being impersonated, and a victim exists that will confirm when fraud is taking place.
Changes in first party fraud during an economic downturn are dramatically different and much more problematic. The baseline level of first party fraud using synthetic, manipulated and the perpetrator’s own identity continue, but they are augmented by real people facing desperate circumstances and existing “good” customers who over-extend while awaiting a turn-around. The problem is that there is no “victim” to confirm fraud is occurring, and the line between fraud (which implies intent) and credit default (which does not) becomes very difficult to navigate.
With limited resources and pressures of their own, at some point lenders must try to distinguish deliberate theft from good customers facing bad circumstances and manage cases accordingly.
The new strategy
When times are good, it’s easier to build up a solid book of business with good customers. Employment rates are high, incomes are stable, and the risks are manageable.
Now, we’re experiencing rapidly changing conditions, entire industries are disrupted, unemployment claims have skyrocketed and customers will need assistance and support from their lenders to help them weather the storm. This is a reciprocal relationship – it behooves those same lenders to help their customers get through to the other side.
Lenders will look to limit losses and strengthen relationships. At the same time, they’ll need to reassess their existing fraud and identity strategies (among others) as every interaction with a customer takes on new meaning.
We’ve all been bracing for a recession for a while. But no one expected it to show up quite like it did. Consumers who have been model customers are suddenly faced with a complete shift in their daily life. A job that seemed secure may be less so, investments are less lucrative in the short term, and small business owners are feeling the pressure of a change in day-to-day commerce.
All of this can lead to unexpected losses from formerly low-risk customers. As this occurs, it becomes more critical than ever to identify and help good customers facing grim circumstances and find different ways to handle those that have malicious intent.
When the economy was strong, many businesses were able to accept higher losses because those losses were offset by immense growth. Unfortunately, the current crisis means that some of those policies could have unforeseen consequences. For instance – the loss of the ability to differentiate between a good customer who has fallen on hard times and someone who’s been a bad actor from the start.
Additionally, businesses need to revise their risk management strategies to align with shifting customer needs. The demand for emergency loans and will likely rise, while loans for new purchases like cars and homes will fall as consumers look to keep their finances secure.
As the need to assist customers in distress rises and internal resources are stressed, it’s critical that companies have the right tools in place to triage and help customers who are truly in need.
The good news
The tools businesses like yours need to screen first party fraud already exist. In fact, you may already have the necessary framework in place thanks to an existing partnership, and a relatively simple process could prepare your business to properly screen both new and existing customers at every touchpoint.
This global crisis is nowhere near over, but with the right tools, your business can protect itself and your customers from increased fraud risks and losses of all sorts – first party, stolen identities, or synthetic identities, and come out on the other side even stronger.
Contact Experian for a review of your current fraud strategy to help ensure you’re prepared to face upcoming challenges.