The cost of synthetic fraud to reach new highs

A TransUnion research finds instances of synthetic fraud and outstanding balances for suspected synthetic accounts at U.S. financial institutions have declined significantly after the WHO declared COVID-19 a global pandemic. However, new analysis by Aite Group finds the cost of synthetic fraud will rebound post-pandemic, reaching new highs.

synthetic fraud cost

Synthetic identity fraud involves fraudsters creating fictitious identities by piecing together real identity attributes and fake information with the intent to open fraudulent accounts.

“The dip in synthetic fraud during the pandemic was a continuation of our 2019 findings that showed synthetic fraud was slowing amid the emergence of solutions that connect personal and digital identities,” said Shai Cohen, SVP of Global Fraud Solutions at TransUnion.

“We believe this slowdown 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. Once synthetic fraud reemerges, which we think it will, companies must be ready.”

Synthetic fraud dropped markedly for most credit products

The latest analysis of outstanding balances attributed to suspected synthetic identities for auto, credit card, retail credit card and personal loans found them at their lowest levels since Q1 2016. As of Q3 2020 (latest data available), synthetic fraud balances in those sectors stood at $855 million—down from a high of $1.05 billion in Q3 2018.

The analysis found instances of synthetic fraud dropped markedly for most credit products for two consecutive quarters (Q2 and Q3 2020). In Q3 2020, the percent of new auto loans and credit card accounts linked to a synthetic fraudster declined to their lowest points since TransUnion began tracking them in 2016.

A 32% decrease in new credit cards and a 23% decline in new auto loans linked to synthetic fraud from Q3 2019 to Q3 2020 was documentes. Beyond financial services, which had by far the highest amounts of digital synthetic fraud in 2020, it determined e-commerce and iGaming were the industries with the second and third highest amounts of synthetic fraud last year.

Dropping outstanding balances for suspected synthetic accounts

Despite the recent drop in synthetic fraud at financial institutions, an Aite Group report finds the cost of synthetic fraud will rise in the coming years. Business losses due to synthetic identity fraud for unsecured U.S. credit products — those that don’t require businesses or individuals to put up any collateral for the loan — will reach $1.8 billion in 2020 and grow to $2.42 billion in 2023.

“Synthetic fraud is an extremely difficult problem to solve,” said Aite Group Research Director, Julie Conroy. “Out of financial services firms that we recently surveyed, 72% said that they believe synthetic identities are a much more challenging issue to identify and address than identity theft.”

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