Merchants Are Losing Billions to Cardholders That Don’t Exist Through Synthetic Identity Theft
One phrase is dominating the discussion of fraud in 2017: synthetic identity theft. A recent concept, this technique is rapidly gaining prominence due to relaxed standards for opening credit card accounts and the increasing availability of stolen personal data.
How Synthetic Fraud Works
Traditional attack methods like account takeover fraud or clean fraud are based on established identities. The fraudster gains access to a cardholder’s account or personal information, then purchases as much as possible within the limited window that exists prior to discovery. Synthetic fraudsters are taking a bolder approach with an eye to the long term: creating fictional identities by combining a stolen social security number with a legitimate address (often a PO box). Posing as these “synthetic” customers, the fraudsters begin applying for credit accounts.
Of course, banks commonly reject credit requests for persons with no credit profile on record. Ironically, however, the very act of inquiring about an account leads credit bureaus to believe a faux customer exists. The odds are good that eventually, some lender will approve credit for an applicant.
Building an Identity
With even one credit card, fraudsters are better-positioned to get approved for additional accounts. They make purchases on the cards, but are careful to keep each account current—at least at first. The goal is to establish the faux-cardholder as creditworthy—and thus eligible for increasingly higher spending limits. This, in turn, makes it easier to get approved for more credit, and the process snowballs.
Once the fraudsters decide the credit limits are high enough—a process that can take years—they will “bust out,” maxing out all the accounts associated with the fake customer before discarding the identity all together.
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The Cost for Merchants
Unlike other types of fraud, synthetic identity theft seldom presents an obvious consumer victim. Since the fraudsters themselves are receiving card statements, there is no one to notice anything amiss. Real cardholders connected to the stolen SSNs aren’t likely to even know their info has been hacked until it shows up as bad credit, which could take decades.
Lack of an injured consumer, however, means the costs of synthetic fraud (and they are huge—see below) are more likely to fall on the merchant. Even if banks don’t demand to be compensated for lost revenue, merchants are still out the cost of the merchandise and related expenses like shipping and processing.
To make matters worse, some fraudsters are “double-dipping”: buying products through fake cardholders, then claiming the purchases were not as expected or were never delivered. They file a chargeback to the banks, the costs of which are all dumped back on the merchant. They commit criminal fraud, then hit the merchant a second time with a friendly fraud attack.
A Rapidly Growing Concern
While only a minor issue less than a decade ago, synthetic identity theft has rapidly evolved into a significant problem. Some experts estimate that banks lost $6 billion or more to synthetic fraud last year, with the technique accounting for as much as 20 percent of bad credit card loans.
Things are likely to get worse, too, especially considering the recent data breach incurred by credit bureau Equifax. But while an abundance of black-market personal data is bad, part of the responsibility also lies with credit issuers. In their ongoing efforts to acquire new customers, banks are making the application and acceptance process easier for everyone…including fraudulent identities.
Synthetic Fraud: Just One Piece of the Puzzle.
If there is a bright side to any of this, it lies in the realization that criminal fraud—including synthetic fraud—accounts for a statistically small portion of credit card fraud as a whole. The bulk of true fraud is caused by either correctable human missteps or challengeable friendly fraud.
Chargebacks911 can help you eliminate these revenue drains so you can concentrate on building stronger relationships with your honest, repeat customers. It’s the best possible solution: reduce fraud and increase profits.
Take a bit out of synthetic identity theft by ending friendly fraud. Let Chargebacks911 show you how.