The Federal Reserve published a report today on Synthetic Identity Fraud, and the impact to U.S. Payment System, which it calls the “fastest growing type of financial crime in the United States.”
- Synthetic identities tend to be more prevalent in the United States than in other countries because identification in the United States relies heavily on static personally identifiable information (PII), including Social Security numbers (SSNs).
The article provides a working definition of synthetic fraud:
- The generally agreed-upon definition of synthetic identity fraud is a crime in which perpetrators combine fictitious and sometimes real information, such as SSNs and names, to create new identities to defraud financial institutions, government agencies or individuals.
The accompanying infographic presents several essential factors:
- 85%-95% of applicants identified as potential synthetic identities are not flagged by traditional fraud models.
- Between 2017 and 2018, the volume of Personally Identifiable Information (PII) exposed increased by 126%, with more than 446 million records exposed.
- 20% of credit losses were attributed to synthetic fraud identity in 2016.
- Synthetic identity fraud costs U.S. Lenders $6 billion in 2016
- The average charge-off balance per instance of synthetic identity fraud in 2016: $15,000
There is no single bullet solution here. Fraud systems like FICO Falcon help mitigate the risk but so many accounts pass through the system as uncontactable, so related collection systems must be wary of low contact accounts.
- We expect fraudsters will continue to commit this type of crime due to the lack of victims reporting fraud, difficulty in detection and high payoffs for fraudsters – compounded by increased digitization of the financial system.
- Like cybercrime, the growing problem of synthetic identity payments fraud cannot be addressed by any government or private sector organization working in isolation. It requires the attention of all payments industry stakeholders to collaborate and work together to understand, detect, mitigate and address synthetic identity fraud in the U.S. payments ecosystem. The Federal Reserve will continue to work transparently and collaboratively with the industry to address the issue of synthetic identity payments fraud, with near-term plans to explore and document the current state of synthetic identity detection, controls and gaps.
The report is definitely worth a read; pay special attention to the inflation of credit card losses, where data suggests that credit losses may be overstated by 20% because of misidentified fraud.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group