A Perfect Storm of Identity Fraud Is on the Horizon

New-account risk assessment is an increasingly challenging proposition for financial institutions of all sizes. Opportunities for new-account fraud are exacerbated by the growing number of consumers who prefer to conduct commerce in the higher-risk online and mobile channels. Additionally, Dodd-Frank dramatically changed the economics of retail banking in the United States, while the Consumer Financial Protection Bureau (CFPB) is intensely scrutinizing new-account risk assessment practices, pushing FIs toward greater financial inclusion.

At the same time, identity fraud is on the rise, fueled by reams of personal data compromised in data breaches. More than 477 million records were compromised in data breaches in 2015 alone, many of which included personally identifiable information (PII). The U.S. migration to EMV also promises further application fraud increases as criminals shift their tactics from counterfeit to other forms of fraud.

In November and December 2015, Aite Group surveyed 88 executives from 83 U.S. FIs to better understand the trends in new-account risk assessment. Here are some of the key findings:

  • FIs are increasingly focusing on digital account acquisitions as they look to expand their reach, reduce operating expense, and increase their relevance with digital natives. While FIs are trying to shift applications to digital channels, there is certainly a price to be paid in the form of higher risk.
  • On average, respondents report a fraud rate eight times higher in the online channel compared to the branch. As a result of the elevated risk, FIs also decline a far higher proportion of accounts in the digital channels.
  • The criminals did not wait for the U.S. October 1, 2015 EMV liability shift date; the majority of FIs surveyed say that application fraud has increased in the online, mobile, and call center channels over the past two years. The branch fraud rate has stayed flat for the majority of respondents, reflective of the fact that fraud is much easier to perpetrate in a faceless environment.
  • For a number of the FIs interviewed, the majority of the fraud is third-party, although synthetic fraud (when the fraudster creates a whole new identity using false information) and true name fraud (when a fraudster uses his or her own identity to perpetrate the scam) are also on the rise.
  • One large FI respondent says that the industry is poised to return to a state in which “identity theft is one of the most pressing problems for the industry.” Another says that 2015 marked an all-time high for application fraud losses, with the attack rate rising every month.

The days when personal data was actually private and confidential are long gone, thanks to the trend of rampant data breaches. This means FIs must use new means of verifying the data presented during the application process. As digital-channel account acquisitions increase, the assessment of applicants’ digital identity is particularly important.

Join Aite Group, American Banker, and Early Warning for a webinar on Tuesday, July 26 at 10 a.m. Pacific/1 p.m. Eastern to delve deeper into the rising tide of application fraud as well as potential solutions. Register for the webinar by clicking here

How can we help?

If you have a question specific to your industry, talk with an Aite Group analyst.  Call us today to learn about the benefits of becoming a client.

Talk to an Analyst

Receive email updates relevant to you.  Subscribe to entire practices or to selected topics within

Get Email Updates