The financial technology industry that’s upending consumer finance could be the solution to a kind of identity fraud that’s dogging traditional banks and fintech companies alike.
It’s called synthetic identity fraud, where instead of stealing one person’s information, criminals synthesize a false identity using information from many people — usually those unlikely to monitor their credit, like children, the elderly, prisoners or the homeless. Fraudsters then establish a credit history for the fake person over time until they can trick banks or financial technology companies into lending them money.
Although most synthetic identity fraud affects credit card and loan products, person-to-person payment applications could be equally vulnerable, according to federal authorities who are monitoring the problem.
The Federal Reserve issued warnings about the practice, and is expected to release a report early next year on ways financial companies can mitigate the problem. A major part of the solution will come from financial technology companies, the Fed said.
“Fintechs are developing artificial intelligence and money laundering models to detect synthetic identity patterns in card and loan applications, among other product areas,” Jim Cunha, who heads the Secure Payments and Fintech division at the Federal Reserve, said in a statement to CQ Roll Call.
Cunha, who is also vice president of the Federal Reserve Bank of Boston, authored the Fed’s most recent synthetic identity fraud report, which came out in October. Other industry leaders agree that technology will aid the solution.
“The speed of innovation means greater business solutions, but also presents greater challenges,” said Amy Zirkle, vice president of industry affairs at the Electronic Transactions Association, which represents more than 500 fintech companies. “Addressing these challenges is top of mind for all of our members.”
Artificial intelligence could help spot anomalies in customer behavior patterns to detect the fraud, the Fed’s October report said.
“No single organization can stop wide-ranging, fast-growing synthetic identity fraud on its own,” the report said. “It is imperative that payments industry stakeholders work together to keep up with the evolving threat posed by synthetic identity fraud, which includes anticipating future fraud approaches.”
Detecting it could require further innovation than currently exists, though. ID Analytics, a credit and fraud risk company, in a report this year said fraud detection computer models failed to flag as much as 85 percent to 95 percent of potential synthetic identity fraud applicants.
The ability to instantly verify that a name and Social Security number match may be a first step. The Social Security Administration is scheduled to roll out a pilot project in June that will provide such instant verification. The current version can take up to several days to verify a match, according to the Fed.
The Fed touted Social Security’s pilot project as a helpful tool, saying the initiative seeks to “educate the industry, create a sense of urgency, and influence action.”
In the last few years there have been dramatic spikes in new credit applications.
Source: Roll Call