CUs Must Prepare for Wave of Post-Pandemic Synthetic Fraud

One residual benefit of the pandemic has been a reduction in instances of synthetic identity fraud – a criminal strategy that involves cobbling together real and fake personal information to open fraudulent accounts or lines of credit with the goal of stealing or moving money. But the financial institutions that are often targeted by synthetic fraud perpetrators shouldn’t relax yet, because it’s expected to surge when payments put off by pandemic loan forbearance programs start to come due.

That’s according to new research from the Chicago-based credit reporting agency TransUnion and Boston-based research firm Aite Group. As of the third quarter of 2020 (the latest data available), outstanding synthetic fraud balances for auto, credit card, retail credit card and personal loans totaled $855 million, a drop from the $1.05 billion reported two years prior, according to TransUnion’s analysis. In addition, TransUnion found new auto loan and credit card accounts tied to synthetic fraudsters declined by 23% and 32%, respectively, from Q3 2019 to Q3 2020 – down to their lowest points since the company began tracking them in 2016.

The decline can be attributed to several factors, explained Lee Cookman, TransUnion’s director of product strategy of global fraud and identity solutions. First, because the pandemic led to the implementation of loan forbearance programs, there were fewer sales of credit profile numbers (CPNs) – alternatives to Social Security numbers sold by credit repair companies to people who are unable to obtain access to credit through traditional means, such as individuals without a government-issued ID, or who have poor credit or a criminal record. Sellers tout CPNs as easy paths to loans for struggling consumers, but because they allow prospective borrowers to hide their true identities, they’re in fact the basis of a common type of synthetic fraud.

The slowdown also stemmed from financial institutions’ growing use of solutions designed to thwart synthetic fraud, as well as the fact that fraudsters shifted their focus in 2020, taking advantage of new opportunities such as the Paycheck Protection Program to exploit consumers, according to Cookman.

Once forbearance programs reach their end, however, desperation to pay bills will increase among consumers, leading to a likely uptick in synthetic fraud. Aite Group estimated that synthetic fraud losses for unsecured U.S. credit products such as auto, credit card, retail credit card and personal loans will grow from a total of $1.8 billion in 2020 to $2.43 billion in 2023.

“We believe this slowdown [in synthetic fraud] was compounded by fraudsters who went elsewhere and could be lying in wait to take advantage of pandemic loan forbearance programs that may not have come due yet,” Shai Cohen, SVP of Global Fraud Solutions at TransUnion, said. “Once synthetic fraud reemerges, which we think it will, companies must be ready.”

Synthetic fraud is particularly concerning for credit unions and other financial institutions because it’s difficult to detect, Aite Group Research Director Julie Conroy pointed out. Many synthetic identities resemble identities of people without a credit history or who are new to the country, and in many cases synthetic fraudsters “play the long game,” building up credit profiles and nurturing fake identities over periods of up to five years before maxing out their credit and vanishing. And out of 46 North American fraud executives Aite Group surveyed in September 2020 for its recent report, “Synthetic Identity Fraud: Diabolical Charge-Offs on the Rise,” 72% said they believe synthetic identities are much more challenging to identify and address than identity theft.

“It’s hard for financial institutions to get their hands around it,” Conroy said. “There are some opportunistic fraudsters who are brought to it by desperate measure, but there’s also a very sophisticated organized crime component, so they’re having to fight the battle on multiple fronts.”

Conroy noted that as a best practice, financial institutions should strive to stop synthetic fraud “at the front door” by identifying patterns that are indicative of synthetic fraud during the onboarding of new customers or members. While some institutions may not have the technology framework in place to detect synthetic fraud, the good news is that many vendors are offering “one stop shop,” multi-pronged solutions that are necessary to help institutions identify potential synthetic fraud, she noted.

The Aite Group report also recommended institutions segment their remediation approach for synthetic fraud once it’s detected, since synthetic fraudsters are often able to bypass traditional, stepped-up authentication processes. In addition, since many synthetic identities are written off as credit losses, Aite Group suggested institutions analyze their existing credit write-offs for potential synthetic fraud.