What to Know About the Growing Threat of Synthetic Identity Fraud
Highlights:
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Synthetic identity fraud is the dominant and fastest-growing credit fraud threat, accounting for 50-70% of credit fraud losses, and is difficult to detect because synthetic identities often age and build legitimate-looking credit histories before engaging in a "bust-out."
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Preventing synthetic identity fraud requires a proactive, multi-layered defense strategy that moves beyond traditional identity verification to include advanced behavioral analytics, continuous monitoring of account activity, and the ability to detect subtle, non-obvious fraud signals within your entire portfolio.
The risk of third-party fraud from synthetic identities continues to grow. Based on an internal Equifax study looking at a variety of industries, it is estimated that a staggering 50-70 percent of credit losses attributed to fraud are the result of synthetic identities.
What Is Synthetic Identity Fraud?
A synthetic identity is fabricated from a combination of real and fake personal information and is often used to perpetuate identity theft, loan stacking, authorized user abuse, and credit washing. Synthetic identity fraud occurs when fraudsters use these fabricated identities to build credit, take out loans and eventually default, or stop making payments, on those loans. As synthetic identities mimic real customers and can take months or years to be discovered, they are notoriously difficult to uncover.
How Synthetic Identities Are Created
Synthetic identities are typically established using a multi-step process:
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Fraudsters begin with a social security number (SSN), which may be manipulated or stolen from vulnerable individuals.
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The SSN is then combined with real or fabricated personally identifiable information (PII)—such as name, date of birth, address, email or phone number—to create a synthetic identity.
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Fraudsters attempt to open accounts and establish credit under these identities, which likely will be denied. These attempts will create or contribute to building a credit file, which fraudsters will use later to apply for loans or credit cards.
How Fraudsters Build Credibility
Once fraudsters establish a synthetic identity, they work to make the persona look as real and authentic as possible using a variety of techniques including:
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Identity Theft: Fraudsters perpetuate identity theft by creating a synthetic identity using a real person’s social security number, name, address, or other PII. Typically, fraudsters target older individuals with a history of credit or may steal the identity of a child to gradually build credit.
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Credit Washing: Fraudsters also establish or inflate their credit history by abusing the reporting dispute process outlined within the Fair Credit Reporting Act (FCRA), filing false claims of identity theft or inaccurate reporting.
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Loan Stacking: Fraudsters gain credibility by applying for multiple loans or credit lines in a short period of time to exploit the lag in time of reporting systems. As a result, they gain a large amount of credit, which fraudsters will max out and abandon the accounts before the fraud is detected.
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Authorized User Abuse: Another tactic fraudsters use to artificially inflate the creditworthiness of synthetic identities is called authorized user abuse or “credit piggybacking.” Adding the synthetic identity as an authorized user to existing credit card accounts with strong credit histories gives the fraudster access to a line of credit.
The Financial Consequences of Synthetic Identity Fraud
Once a fraudster has established sufficient credit with a synthetic identity, they often initiate a bust out. A bust out is the point where a fraudster maxes out all the acquired credit lines, drains any accounts of all available funds or assets, and then abruptly stops making payments or abandons the accounts.
The timing of the bust out can vary, but the impact usually results in financial losses for businesses. And since the identity is not tied to a real person, it can be incredibly difficult to find the parties involved.
The Key to Preventing Synthetic Identity Fraud
Combating synthetic identity fraud is a complex and constant challenge, demanding a sophisticated, multi-faceted strategy that not only identifies malicious activity but also ensures a smooth experience for verified customers.
What to Look for in a Fraud Solution Provider
When shopping for a synthetic identity solution provider, look for these three key components:
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High Capture Rate: Capture rate is the percentage of fraudulent transactions or entities successfully identified and blocked. Look for a solution that is designed to identify and flag synthetic identities, particularly within the riskiest segments of applications. Ask providers about their capture rate and their solutions’ ability to detect synthetic identity red flags.
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Low False Positive Rate: The right solution should be able to target fraudulent activity with precision. That means catching the most amount of fraud possible while minimizing impact to authentic accounts. Ask providers about their machine learning models and decision accuracy.
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Transparency: When it comes to fraud decisioning, you should know why and how an approve or decline recommendation was made. Look for a provider that offers transparent reporting and real-time monitoring, allowing you to have the ability to make adjustments as needed.
Synthetic identity fraud is an ongoing challenge that can lead to significant financial losses. Though these fabricated identities can be difficult to uncover, businesses can proactively protect their portfolios and reduce risk by adopting a sophisticated, multi-faceted strategy.
By leveraging solutions with a high capture rate, low false-positive rate, and transparent decisioning, businesses can not only thwart fraudsters but also ensure a seamless, secure experience for their verified customers.
Get Synthetic Identity Fraud Protection Today
At Equifax, we are committed to providing comprehensive, proactive defenses against synthetic identity fraud to enable businesses to confidently grow and serve their customer base. We’ve helped businesses all over the world fight synthetic identity fraud.
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