Synthetic identity fraud is one of the fastest-growing types of fraud right now — it costs banks an estimated $6 billion and accounts for 10 to 15% of the charge-offs in an average unsecured lending portfolio.
To create a synthetic identity, criminals use a blend of stolen and fabricated information to open new accounts or take out loans. They may spend a long time building up their synthetic identity to increase the amount of credit they can obtain, or they may work quickly targeting a large volume of small transactions in a short time period.
In either case, once the criminal maxes out their lines of credit or overdraws their accounts, your financial institution will be saddled with the losses. To protect yourself, take these tips into account.
1. Focus on the Top of the New Customer Funnel
Once a criminal has opened an account with a synthetic identity, they try not to draw any more attention to themselves, and often, they don’t exhibit any strong signs of fraudulent behavior until the end of the scheme when they max out their accounts and run with the funds.
You need a protective detection strategy that focuses on the top of the new customer funnel. Most synthetic identities can pass the Know Your Customer, Customer Identification Program, and other routine onboarding checks. Yto spot this type of fraud, you may need to invest in new defense strategies.
2. Don’t Let Sales Goals Diliute Anti-Fraud Efforts
Don’t let the pressure to grow deposits or fund new loans lead to an overrelaxation in your screening process. Make sure that your sales goals are in line with your fraud-fighting efforts. Letting synthetic identities slip through the cracks due to overly aggressive sales goals will lose you money in the long run.
However, at the same time, you have to avoid being overly cautious. If your screening criteria are too rigid, your system will flag a lot of false positives, and disruptions in the onboarding process can push some legitimate customers away. Ultimately, you need a fraud detection and prevention solution that balances risk with the customer experience.
3. Be Cautious of a Lack of Information
A lack of information can be a red flag that you’re dealing with a synthetic identity. Most legitimate people have a detailed history that includes records of driver’s licenses, automobile ownership, jobs, schools, and a few addresses. If someone doesn’t seem to have a history, their identity may be pieced together from stolen or fabricated details.
4. Take a Multi-Layered Approach
Don’t rely on a fraud detection solution that only looks at a single factor. For instance, if your solution only looks at the applicant’s length of credit history, it will create false positives for legitimate customers who have slim credit files. But it will miss synthetic identities that have taken a few years to build up their credit history.
To be effective, your solution needs to look at multiple customer characteristics. In particular, it should use link analysis to detect identities that seem separate but overlap. For instance, there is an overlap if multiple applicants use the same Social Security Number or the same IP address.
5. Look for Unusual Credit File Markers
In addition to a lack of credit history, credit files with a rapid rise in the FICO score or a lack of credit card use followed by sudden numerous requests for large credit line increases can also signify a high likelihood of synthetic identities.
Additionally, many criminals add the synthetic identity to a real person’s account as an authorized user in an effort to build up their credit history quickly — applicants listed as authorized users on multiple accounts, especially with people who live in different cities or have different surnames can be another sign of trouble.
Synthetic identities can increase your risk of losses and charge-offs, threaten your reputation, and potentially even lead to fines for non-compliance with Know Your Customer regulations. To protect your financial institution, you need tools in place that can help you spot synthetic identities as accurately as possible.
At SQN Banking Systems, we provide the latest technology in fraud detection and prevention. To learn more, contact us today. We can help you minimize threats from synthetic identities and other types of fraud.