Is identity fraud becoming a leading economic indicator?
Economists continue to debate whether the next recession is around the corner or several years off. In recent months, ID Analytics has observed an interesting trend – fraudsters appear to be behaving as if the economy is already in a recession; meaning, we are seeing an increase in certain forms of identity fraud that tend to spike during an economic downturn.
There are several types of identity fraud which attack enterprises at account opening – third-party fraud (identity fraud), first-party fraud and synthetic fraud. Synthetic fraud and many forms of third-party fraud are relatively agnostic to the state of the economy – they are performed by fraudsters who will continue to target lenders and service providers regardless of whether the economy is on an upswing or in a recession.
Some forms of identity fraud increase when the economy is on a downswing and individuals find themselves more in need of short-term financial assistance. In these cases, opportunistic fraudsters seek immediate monetary gain in exchange for some type of consequence, such as a drop in their credit score or damage to a personal relationship. ID Analytics has observed a spike in two such behaviors in recent months which merit attention: first-party fraud and family fraud.
First-party fraud: Presents individuals with an opportunity for quick financial gain – they might apply for unsecured loans and credit cards with no intention to pay them back, or they may apply for mobile plans and retail cards which offer quick access to goods which can be resold, such as televisions or computers. First-party fraudsters knowingly apply for these forms of credit and services with an understanding that their creditworthiness may decline precipitously when they default, handicapping their ability to access credit and services until the delinquent accounts are removed from their credit report (which typically takes seven years).
Family fraud: Occurs either at account opening or during account life, in the form of account takeover for instance, when one family member steals another family member’s identity. In these scenarios, the fraudster leverages their knowledge of the victim’s personal information and their access to the victim’s devices and identifiers in order to impersonate them. Typically, the consequences of family fraud are mostly social – over time the victim may learn that it was a family member who stole their identity and ostracizes the fraudster from the family. However, it’s not unheard of for victims of family fraud to press charges and they may have a higher rate of success than victims of other types of identity fraud since the fraudster is known to the victim.
In the past 18 months, ID Analytics has seen a continuing rise in the observed risk of first-party fraud in new credit and service applications, and have heard consistent anecdotal reports from many of our customers that family fraud is on the rise.
Certainly, this trend presents a series of risk management challenges. First-party fraud is notoriously challenging to prevent even with strong risk detection – but it also poses a question as to why these behaviors are on the rise outside of a recession. One possible explanation is that the knowledge of how to commit and monetize these crimes is increasingly common. Another is that these fraud increases are serving as a leading indicator of a forthcoming recession.
Regardless of whether we’re seeing a change in consumer awareness of how to commit identity fraud, or the early impacts of a recession, this uptick in first-party and family fraud is a concerning sign for lenders and service providers. In both scenarios, we’re seeing an increase in these fraudulent activities during a time of economic growth, a trend which seems likely to rise when the U.S. economy inevitably enters a recession – whether that is in three months or three years.
This blog is the first in a series of research posts ID Analytics will release that highlight the trends and critical factors that we believe will define the next 12 months of identity fraud in the U.S. We continue to invest in both the development of new analytical solutions to help enterprises combat identity fraud, as well as in the research capabilities which allow us to provide unique, leading insight into fraud trends. I look forward to sharing more in the coming months!
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Kevin King is Head of Marketing at ID Analytics