This article was updated on March 4, 2024.
If you steal an identity to commit fraud, your success is determined by how long it takes the victim to find out. That window gets shorter as businesses get better at knowing when and how to reach an identity owner when fraud is suspected. In response, frustrated fraudsters have been developing techniques to commit fraud that does not involve a real identity, giving them a longer run-time and a bigger payday.
That’s the idea behind synthetic identity (SID) fraud — one of the fastest-growing types of fraud.
Defining synthetic identity fraud
Organizations tend to have different definitions of synthetic identity fraud, as a synthetic identity will look different to the businesses it attacks. Some may see a new account that goes bad immediately, while others might see a longer tenured account fall delinquent and default. The qualifications of the synthetic identity also change over time, as the fraudster works to increase the identity’s appearance of legitimacy. In the end, there is no person to confirm that fraud has occurred, in the very best case, identifying a synthetic identity is inferred and verified. As a result, inconsistent reporting and categorization can make tracking and fighting SID fraud more difficult.
To help create a more unified understanding and response to the issue, the Federal Reserve and 12 fraud experts worked together to develop a definition. In 2021, the Boston Federal Reserve published the result, “Synthetic identity fraud is the use of a combination of personally identifiable information to fabricate a person or entity to commit a dishonest act for personal or financial gain.”1 To break down the definition, personally identifiable information (PII) can include:
- Primary PII: Such as a name, date of birth (DOB), Social Security number (SSN) or another government-issued identifier. When combined, these are generally unique to a person or entity.
- Secondary PII: Such as an address, email, phone number or device ID. These elements can help verify a person or entity’s identity.
Synthetic identities are created when fraudsters establish an identity from scratch using fake PII. Or they may combine real and fake PII (I.e., a stolen SSN with a fake name and DOB) to create a new identity. Additionally, fraudsters might steal and use someone’s SSN to create an identity – children, the elderly and incarcerated people are popular targets because they don’t commonly use credit.4 But any losses would still be tied to the SID rather than the victim.
Exploring the Impact of SID fraud
The most immediate and obvious impact of SID fraud is the fraud losses. Criminals may create a synthetic identity and spend months building up its credit profile, opening accounts and increasing credit limits. The identities and behaviors are constructed to look like legitimate borrowers, with some having a record of on-time payments. But once the fraudster decides to monetize the identity, they can apply for loans and max out credit cards before ‘busting out’ and disappearing with the money.
Aite-Novaric Group estimates that SID fraud losses totaled $1.8 billion in 2020 and will increase to $2.94 billion in 2024.2 However, organizations that do not identify SIDs may classify a default as a credit loss rather than a fraud loss.
By some estimates, synthetic identity fraud could account for up to 20 percent of loan and credit card charge-offs, meaning the annual charge-off losses in the U.S. could be closer to $11 billion.3 Additionally, organizations lose time and resources on collection efforts if they do not identify the SID fraud.
Those estimates are only for unsecured U.S. credit products. But fraudsters use synthetic identities to take out secured loans, including auto loans.
As part of schemes used to steal relief funds during the pandemic, criminals used synthetic identities to open demand deposit accounts to receive funds. These accounts can be used to launder money from other sources and commit peer-to-peer payment fraud. Deposit account holders are also a primary source of cross-marketing for some financial institutions. Criminals can take advantage of vulnerable onboarding processes for deposit accounts where there’s low risk to the institution and receive offers for lending products.
Building a successful SID prevention strategy
Having an effective SID prevention strategy is more crucial than ever for organizations. Aside from fraud losses, consumers listed identity theft as their top concern when conducting activities online. And while 92% of businesses have an identity verification strategy in place, 63% of consumers are “somewhat confident” or “not very confident” in businesses’ ability to accurately identify them online.
Read: Experian’s 2023 Identity and Fraud Report
Many traditional fraud models and identity verification methods are not designed to detect fake people. And even a step up to a phone call for verification isn’t enough when the fraudster will be the one answering the phone.
Criminals also quickly respond when organizations update their fraud detection methods by looking for less-protected targets. Fraudsters have even signed their SIDs up for social media accounts and apps with low verification hurdles to help their SIDs pass identity checks.5
Understand synthetic identity risks across the lifecycle
Synthetic Identities are dynamic. When lending criteria is tightened to synthetics from opening new accounts, they simply come back when they can qualify. If waiting brings a higher credit line, they’ll wait. It’s important to recognize that synthetic identity isn’t a new account or a portfolio management problem – it’s both.
Use analytics that are tailored to synthetic identity
Many of our customers in the financial services space have been trying to solve synthetic identity fraud with credit data. There’s a false sense of security when criteria is tightened and losses go down—but the losses that are being impacted tend to not be related to credit. A better approach to synthetic ID fraud leverages a larger pool of data to assess behaviors and data linkages that are not contained in traditional credit data.
You can then escalate suspicious accounts to require additional reviews, such as screening through the Social Security Administration’s Electronic Consent Based SSN Verification (eCBSV) system or more stringent document verification.
Find a trusted partner
Experian’s interconnected data and analytics platforms offer lenders turnkey identity and synthetic identity fraud solutions. In addition, lenders can take advantage of the risk management system and continuous monitoring to look for signs of SIDs and fraudulent activity, which is important for flagging accounts after opening. These tools can also help lenders identify and prevent other common forms of fraud, including account takeovers, e-commerce fraud, child identity theft fraud and elderly fraud.
Learn more about our synthetic identity fraud solutions.
1Federal Reserve Bank (2021). Defining Synthetic Identity Fraud
2Aite Novarica (2022). Synthetic Identity Fraud: Solution Providers Shining Light into the Darkness
3Experian (2022). Preventing synthetic identity fraud
4The Federal Reserve (2022). Synthetic Identity Fraud: What Is it and Why You Should Care?
5Experian (2022). Preventing synthetic identity fraud
