What Is Identity Fraud and How Do You Stop it?

Identity fraud hit $43 billion in losses in 2023, affecting 15 million people and climbing 13% year-over-year, according to the AARP 2024 Identity Fraud Report.). For the industries handling the most sensitive data, that trajectory isn’t a warning sign. It’s a mandate.

Banks, fintechs, crypto platforms, BNPL lenders, and government agencies share a common problem: they are the highest-value targets, and they’re operating in digital environments that fraudsters have had years to probe, test, and exploit. The attack surface isn’t growing — it’s already grown.

Given these challenges, the need for advanced, multi-layered identity verification and fraud prevention has never been higher. Here’s what identity fraud actually looks like today, how it works, and what organizations can do to 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. Identity fraud hits organizations at every layer — direct losses, chargeback exposure, manual review costs, regulatory risk, and the harder-to-quantify damage of onboarding bad actors who slip through. The question for most fraud and risk teams isn’t whether to prioritize it. It’s how to do it without blocking the real customers who look risky on the surface.

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.

What Are the Different Types of Identity Fraud?

Identity fraud falls into three distinct categories: first-party fraud, where a real customer deceives the business; third-party fraud, where a criminal steals someone else’s identity; and synthetic fraud, which blends real and fabricated data into a new identity.

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

Fraudsters carry out identity fraud across physical, digital, and social channels, often combining multiple methods in a single attack. They steal wallets, intercept mail, scrape social media, deploy phishing campaigns, and exploit breached databases. Here are the key methods organizations need to understand:

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.

Physical Theft and Interception

Not all identity fraud starts online. Criminals still steal wallets and purses for the IDs, credit cards, and bank cards inside. They go through trash to retrieve bank statements, tax documents, and pre-approved credit card offers that haven’t been shredded. “Shoulder surfing,” where a fraudster watches someone enter a PIN or card number in a public place, remains a common tactic. Mail theft is another vector: if a mailbox is accessible or mail is left unattended, fraudsters can intercept account statements, new cards, and other sensitive correspondence. These physical methods often provide the raw identity data that fuels larger digital fraud schemes.

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 need a multi-layered approach to identity and fraud prevention that uses diverse data and AI to stay ahead of evolving threats, while also providing a hassle-free customer experience.

Socure’s Sigma Identity Fraud delivers real-time risk intelligence across identity, device, behavioral, and consortium signals through a single API, powered by a transformer model trained on billions of identity records. It’s a system that learns, adapts, and improves every time fraud patterns shift. 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:

• Cross-industry identity intelligence from 3,000+ enterprise customers — giving Socure visibility into fraud patterns that no single institution can see on its own.
• 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

See what Sigma Identity Fraud can do for your organization — or talk to one of our experts to build the right fraud strategy for where you are now.