Many consumers believe that the most common form of fraud is related to credit card transactions and that this type of fraud doesn’t impact them much beyond being a minor inconvenience when a transaction is declined at the point of sale, or when they have to be issued a new card. Identity fraud is much more complex than a fraudulent credit card charge – it victimizes people’s identities by using their information to open new bank accounts, make retail purchases, acquire wireless service, and obtains thousands of dollars in loans – all fraudulently.
There’s a method to how fraudsters work. Their approach is smart and strategic. Fraudsters will wait patiently and pounce when the opportunity is most lucrative. As criminals become increasingly sophisticated, the incidence of identity fraud has expanded across a variety of industries, including telecommunications, bank cards, retail cards and marketplace lending.
This post explores the fraud rates and top trends identified through an analysis of the ID Network, a patented network of information including these four markets. All statistics are derived from ID Analytics’ internal and proprietary analytics.
ID Analytics works with 4 of the top 5 wireless carriers in the United States and scores the majority of new account applications for identify fraud related to wireless phone contracts, landline subscriptions and broadband cable services. In 2014, we observed spikes in wireless fraud rates during popular phone launches and the holiday season. Between February and September, 2014 wireless fraud rates were fairly consistent, with ranges between 0.18% and 0.22%. Following the launch of the Apple iPhone 6 and iPhone 6 plus on September 9, we saw October fraud rates grow to 0.27%. We observed continued acceleration of fraud rates in November and December, hitting the high for 2014 at 0.43% in December. This is approximately a 200% increase from earlier in the year.
ID Analytics also works with 4 of the top 5 bank-branded credit card issuers in the United States. Historically, identity fraud rates have been remarkably consistent month-over-month with bank cards and this proved true again in 2014. Between January and September 2014, fraud rates varied between 0.38% and 0.44%. There was a small increase to 0.48% in October 2014, which returned to 0.40% in November. A common challenge in detecting bank card identity fraud is that it can take three or more billing cycles to become apparent. First payment default (i.e., never making a payment starting from the very first billing cycle) tends to be a strong indicator of fraudulent activity and should continue to be scrutinized vigorously.
Identify theft in retail cards tends to be more variable from month-to-month than with bank cards, which is partially due to spikes in application volume during holidays and promotions. In 2014, we observed fraud rates peak at 0.63% in February and steadily decline to a low of 0.25% in November. When a consumer applies for a new retail card, retailers have the added complexity of needing to verify identities in minutes, if not seconds, at the point of sale. When a retailer is unable to match the application information to the credit bureau data, a “fraud alert” can be triggered, which prevents the approval of their customer for a retail card. The result is an unhappy customer and sometimes a lost sale. The need to make an instant credit decision, sell merchandise and retain the lifetime value of the retail customer makes finding the right balance between customer experience and risk management in retail card issuing paramount.
In 2014 and 2015 Marketplace lending officially entered the mainstream with several high-profile initial public offerings (IPO’s)1. This sector had the highest fraud rate in 2014 as observed in our analysis. From April through August, fraud rates varied from a low of 0.9% in May to a high of 1.2% in June, which is two to three times higher than the other markets included in this analysis. Given that most marketplace loans range from $9,000 to $14,000, fraudsters targeting these platforms can get fast access to a fairly large-scale payoff using an entirely remote application channel.
As with any criminal activity, fraudsters are always looking for new ways to generate easy, consistent cash. As fraud schemes become more sophisticated and expand into the emerging lending and payment markets, organizations need more advanced tools for protecting their business. By applying the right mix of data, science, and software, these businesses can stay ahead of the fraudsters, while maintaining a friction-less process for legitimate customers. To learn more about managing fraud, read our Insight into Identity Risk through Attributes white paper.
Garient Evans is Vice President of Solutions Services at ID Analytics, LLC
1. Bass, Jackie. Crowdneticwire (17 December 2014) OnDeck, Another Successful Marketplace Lending Platform IPO retrieved April 21, 2015 from Crowdnetic