What Is Identity Fraud and How Do You Stop it?

Identity fraud reached alarming levels in 2023, affecting 15 million people and causing $43 billion in losses.. This represents a 13% increase in losses from the previous year, highlighting a troubling trend. 

Banks, e-commerce companies, government organizations, crypto platforms, and Buy Now Pay Later (BNPL) lenders — are particularly vulnerable. These sectors routinely handle large amounts of sensitive personal and financial data, making them prime targets for cybercriminals. Additionally,the rapid shift to digital services and online transactions has often outpaced the implementation of robust security measures. This gap has created opportunities for fraudsters to exploit weaknesses in these systems.

Given these challenges, the need for advanced, multi-layered identity verification and fraud prevention has become more critical than ever. Read on to discover everything you need to know about identity fraud and how to effectively stop it.

What Is Identity Fraud?

Identity fraud occurs when someone unlawfully obtains and uses another person’s personal information without their consent,typically for financial gain. Safeguarding against identity fraud in all its forms is critical to the financial health of you and your customers. It’s also a key way to protect your brand reputation, keep consumer trust strong, and avoid expensive losses that can hurt your bottom line. 

There are several ways in which bad actors will commit identity fraud, including: 

• New account fraud: Fraudsters use stolen or fake personal information to open new accounts in someone else’s name.
• Account takeover fraud: Criminals gain unauthorized access to a legitimate user’s account, often changing login credentials and making unauthorized transactions.
• Synthetic identity fraud: Scammers create fake identities by combining real and fabricated information to establish fraudulent accounts and credit lines.
• First-party fraud: A person uses their own identity to obtain goods or services with no intention of paying, often by providing false information about their financial situation.

As technology advances, so do the tactics of fraudsters. New threats are emerging daily across the digital economy. In banking, mobile banking fraud and authorized push payment scams are on the rise. In these schemes, people are tricked into approving payments to fake accounts. Ecommerce companies are seeing more card-not-present fraud and refund abuse. Government organizations face growing problems with benefits fraud and tax identity theft. In the iGaming sector, bonus abuse and multi-accounting schemes have appeared, where fraudsters exploit promotions and create multiple accounts for unfair advantages.

By understanding and addressing these evolving threats, you can better safeguard your organization and your customers.

What Are the Different Types of Identity Fraud?

Identity fraud can be categorized into three main types: first-party fraud, third-party fraud, and synthetic fraud. Each type presents unique challenges for businesses and requires specific strategies to detect and prevent.

• First-Party Fraud

First-party fraud is distinct from other types because it exploits the trust businesses place in authenticated, verified customers. This makes it particularly difficult to detect and prevent. In first-party fraud, a legitimate customer intentionally defrauds a company. For example, they might take out a loan with no intention of repaying it. Other examples include filing false insurance claims, maxing out credit lines without planning to repay, and deliberately writing bad checks.

• Third-Party Fraud

Third-party fraud involves a cybercriminal stealing a real person’s identity for a quick “smash and grab” scheme. In a normal transaction, only two parties are involved: the customer and the merchant. However, in third-party fraud, an additional party enters the picture. This fraudster uses false information to gain unauthorized access to accounts, make transactions, and open new accounts in the victim’s name.

• Synthetic Fraud

Synthetic fraud is a more advanced and complex form of cybercrime. In this type of fraud, criminals combine real and fake elements to create an entirely new identity. Fraudsters cultivate these manipulated or synthetic IDs over months or years to maximize financial gain before “busting out.” They use credible pieces of information, such as a Social Security number (often belonging to a child or deceased person), to build identities that appear real but have no actual victim.

As companies improve their defenses against conventional third-party schemes, fraudsters are rapidly shifting to synthetic fraud and other complex attacks. This trend has made synthetic fraud the fastest-growing financial crime, now accounting for 10-15% of charge-offs in unsecured lending portfolios.

How Fraudsters Carry Out Identity Fraud

To protect themselves and their customers from the ever-evolving threat of identity fraud, organizations must stay up-to-date on the methods and tactics used by cybercriminals. Here’s a detailed list of key exploits fraudsters use:

• Data Breach Exploitation

Identity fraudsters often begin their attacks by purchasing stolen personal data from data breaches. With over 10 billion compromised accounts worldwide, much of this data is available for sale on dark web marketplaces or auctioned to the highest bidder.

• Randomization of Social Security Numbers (SSNs)

Legacy identity detection systems relied on geographic data in social security numbers to match identities. However, the Social Security Administration randomized SSNs in 2011. Fraudsters now take advantage of this by using randomly generated or stolen SSNs to operate while avoiding detection.

• Social Engineering

Modern social engineering has become highly sophisticated. Cybercriminals use advanced phishing and vishing techniques to target customers. Phishing often involves well-crafted emails and fake websites that mimic legitimate organizations, tricking individuals into disclosing sensitive information.

Vishing, or voice phishing, deceives victims over the phone. Fraudsters use caller ID spoofing to appear as trusted entities. They may also manipulate call centers and customer service channels by posing as genuine customers, exploiting weak authentication processes to access personal information and accounts.

• Synthetic Identity Creation

Creating synthetic identities involves combining real and fake information to create a seemingly legitimate persona. This process typically starts with a valid SSN. Fraudsters then fabricate additional details, including a fake name, date of birth, and address. They gradually build a credit profile by applying for credit with this synthetic identity. Initially, they might use secured credit cards or small loans, repaying them to establish a positive credit history. Over time, they apply for larger lines of credit and loans.

• Technological Exploitation

Technology has enabled fraudsters to develop advanced tools and techniques to compromise and manipulate data. Bots are now often used for credential stuffing and account takeover attempts, systematically trying to log into accounts using combinations typically obtained from data breaches.

AI and deepfake technologies are being used to bypass biometric checks, which rely on unique physical characteristics like fingerprints or facial recognition. Cybercriminals can create deepfake videos or audio clips that mimic the victim’s appearance or voice with high accuracy, further complicating detection efforts.

Strategies for Protecting Against Identity Fraud

Despite the increasing sophistication of cybercriminals’ methods, organizations have access to various powerful countermeasures to protect against identity fraud. Here are some top security strategies to implement:

• Multilayered identity verification

Using multiple verification methods to confirm a person’s identity before giving them full access to your ecosystem can make it harder for fraudsters to break through.  This includes risk-based authentication for different transaction types, including step-up verification workflows like ID document verification.

• Advanced analytics and machine learning 

Organizations can leverage behavioral biometrics to identify anomalous user patterns and employ device intelligence to detect suspicious login attempts. Machine learning algorithms continuously learn and adapt, improving their accuracy in identifying fraudulent activities over time.

• Real-time fraud attack detection 

This strategy involves the use of consortium data, which pools information from multiple organizations so that businesses can achieve broader fraud pattern recognition in real time. This approach helps identify emerging fraud trends and schemes that might not be immediately apparent to any organization operating alone, and allows them to make necessary changes to prevent the same type of attack from hitting their systems.

• Enhanced document verification 

Documents remain a crucial form of identification. By employing AI-powered document authenticity checks and implementing liveness detection for selfie verifications, organizations can add an extra layer of security to the verification process.

Challenges in Implementing Effective Fraud Prevention

Though it’s critical to implement strong identity fraud controls to protect your organization, implementing these solutions can be a complex undertaking. Additionally, a poorly set-up system can actually weaken your protection and lead to negative consequences. Here’s a breakdown of the main challenges to consider::

• Balancing Security and User Experience

A key challenge in establishing robust fraud prevention is maintaining equilibrium between security and user experience. With 81% of customers prioritizing ease of use when interacting with brands online, fraud prevention must strike a delicate balance between security and frictionless experiences. 

Legacy identity verification systems that rely on credit header data struggle to keep pace with modern digital fraud attacks. This means that digital-savvy fraudsters can slip through your defenses much easier, and you will also have to push many ‘good’ customers to manual review, causing friction and frustration. This situation calls for the implementation of highly effective, seamless security measures that use various data sources for a more comprehensive view of a consumer’s identity. This ensures more accurate outcomes and smooth user experiences.

• Keeping Pace With New Tactics

Fraudsters are always looking for new ways to exploit weak fraud detection systems.. Static, rules-based risk models can leave organizations vulnerable to new and evolving attack vectors. Companies  should consider partnering with a solutions partner who uses machine learning models that can adapt in real time to the ever-changing fraud landscape..

• Breaking through Data Silos 

Comprehensive fraud detection requires comprehensive data visibility. Fragmented data sources hinder real-time fraud prevention efforts. Most providers offer limited single-point solutions, falling short of platforms that provide holistic, 360-degree consumer views based on identity graphs from diverse consortium data.

• Navigating Regulatory Compliance

Businesses must navigate the complexities of data protection regulations like CCPA and the GDPR. These mandate specific measures for data privacy, consent, and security, requiring continuous monitoring and adjustments. Additionally, meeting Know Your Customer (KYC) and Anti-Money Laundering (AML) requirements complicates efforts to maintain smooth customer experiences while accurately verifying identities.

• Overcoming Resource Constraints

Securing adequate budgets for in-house fraud model development is challenging. Many organizations also underestimate the rapid evolution and sophistication of modern fraud threats, and the constant maintenance an in-house model requires.  Partnering with a vendor who can help you stay ahead of evolving fraud threats and ease your operational burden will yield a significant return on investment. 

Socure: A Comprehensive Solution to Identity Fraud Challenges

Identity fraud poses severe financial and reputational risks for both organizations and their consumers. Organizations must take a multi-layered approach to identity and fraud prevention that leverages diverse data and AI to stay ahead of evolving threats, while also providing a hassle-free customer experience.

Socure’s Sigma Fraud suite provides actionable risk intelligence across fraud types through a single API, replacing complex rules and inconsistent performance from disjointed point solutions.  Using its proprietary identity graph, Socure can see a consumer’s behavior from their earliest engagements in the financial ecosystem to the current risk decision. That means, organizations can say yes to the maximum number of good individuals while minimizing identity fraud risk.

Other unique capabilities include:

• Extensive Consortium Network: Leverages insights from 2,500+ customers across various industries providing rich identity intelligence 

• Fully Integrated Solution: End-to-end suite covering PII, digital, and behavioral risk assessments for consistent, accurate results
• Advanced Behavioral Analysis: Real-time anomaly detection across individual, company, industry, and network levels
• Persistent Identity Tracking: Unique SocureIDs and comprehensive identity graphs for true customer-centric views across ecosystems
• Superior performance: Captures up to 99% of ID fraud in the top 5% of riskiest users, with less than 5% review rates

Learn more about Sigma Identity Fraud or contact Socure for a personalized consultation to strengthen your fraud prevention strategy.