Synthetic fraud is falling at financial institutions during the coronavirus pandemic, though opportunities for this fraud type will increase in the next few years, according to technology analyst firm Aite Group.
A study from the group, working in conjunction with credit bureau TransUnion, found the losses from synthetic fraud in unsecured U.S. credit products — loans that don't require collateral, such as autos and credit cards — will grow to $2.42 billion in 2023.
In automotive lending, where retrieving a stolen vehicle is more difficult than canceling a line of credit, a post-pandemic fraud rebound could cost lenders millions.
The emergence of solutions that connect personal and digital identities slowed fraud levels in automotive lending to their lowest since TransUnion began tracking them in 2016, said Lee Cookman, TransUnion's director of product strategy of global fraud and identity solutions.
"These lenders are much more prepared and we put more options in their hands to address this than we have in the past," he said.
The incidence rate of new auto loans linked to synthetic fraud declined 23 percent in the third quarter of 2020 compared with the third quarter of 2019, TransUnion said. The credit bureau documented $543.8 million in outstanding auto loan balances containing synthetic fraud in the third quarter of 2020, down 17 percent from the same period in 2018.
Fraudsters availing themselves of pandemic loan forbearance programs could be hiding inside lender portfolios, Cookman said. As those programs end and legitimate customers resume payments, fraudulently obtained automotive loans will enter delinquency, he said, driving up charge-off rates at auto lenders.
Lenders can protect themselves from fraud in different ways, according to Julie Conroy, research director for Aite Group's fraud and anti-money-laundering practice. Asking out-of-wallet questions, such as parents' middle names or previous addresses, helps to confirm identity. But many synthetic-identity users can outwit such barriers.
"They've been nurturing these identities for 18 months, all the way up to five years," Conroy said. "They're going to know the answers, because they set them up. You can't send a SMS to a mobile phone because they're going to have a mobile phone in the name of the identity and they're going to respond to it."