This Fast-Growing Threat Source Costs Billion Per Year
Following the Equifax breach in September 2017, everyone wants to know more about a specific hot-button topic: synthetic identity theft.
What is this form of online identity fraud, and how does it impact both businesses and consumers alike?
What is Synthetic Identity Theft?
Also known as synthetic fraud, this is a form of criminal activity involving stolen consumer data. Other tactics like clean fraud or account takeover might attempt to freeze existing customers out of their accounts or impersonate cardholders and use their information. Synthetic fraud goes a step beyond, with cyber criminals using compiled stolen data to make up entirely new identities.
Synthetic identity theft is essentially the “Frankenstein” approach to criminal fraud. As the name suggests, the perpetrator uses partially-complete information, like an individual’s Social Security number, to create a fake consumer. That person can then apply for credit cards, apply for loans, and much more.
Synthetic fraud snowballs quickly. These fake users might be declined for their first, second, or even their third credit card applications. However, the more times the fake identity is used to apply, the more likely it is that a bank will eventually approve an application. Once they have one card, it becomes easier and easier to acquire new lines of credit.
Pulling off synthetic fraud requires patience; the fraudster needs to gradually build up a stack of credit cards in the fake user’s name, which may take years. Eventually, though, the fraudster will “bust out”—maxing out all the cards in a sudden burst before abandoning the identity—creating a mountain of trouble for the victims left behind.
Consequences for Consumers
Synthetic identity theft has serious consequences for consumers. If your data is used by a criminal in a synthetic fraud attack, you may not know it for years. Eventually, though, it will catch up with you.
When a fraudster uses your Social Security number, any credit cards or loans they take out will be attached to you. So, when they inevitably decide to cut-and-run, you will be the one left holding the bill.
This could have long-term ramifications for your credit. Your credit rating would suffer, which could limit your access to lines of credit like loans and mortgages. Interest rates for any loans you manage to take out will be much higher. You may even be denied a lease on a car or a home.
Consequences for Merchants
Although consumers face the direct consequences from synthetic identity theft, the fallout goes beyond consumers and ultimately rests with businesses once the fraud is found out.
Banks might demand to be compensated and overturn transactions, meaning merchants lose the sales revenue, as well as the merchandise shipped and the cost of shipping and processing.
As if to add insult to injury, fraudsters might even “double dip” on merchants. A fraudster could buy products using a synthetic identity, then pose as the fake user and claim that he or she never received the goods ordered. The fraudster files a chargeback with the bank, stacking a friendly fraud chargeback on top of the synthetic fraud transaction.
Synthetic Identity Theft: Just Scraping the Surface
It’s estimated that Synthetic fraud represents roughly 85% of identity fraud in the US, costing merchants roughly $2 billion per year as of 2015. The silver lining—if you can call it that—is the fact that identity fraud represents a comparatively small portion of the overall burden.
For example, merchants lose substantially more due to friendly fraud than synthetic fraud. Current estimated suggest the cost of friendly fraud may reach $30 billion a year by 2020!
If you’re interested in learning more about this fast-growing problem, click here to get started.