Fraud Trends

--by Kennis Wong

It's true that intent is difficult to prove. It's also true that financial situations change. That's why financial institutions have not, yet, successfully fought off first-party fraud. However, there are some tell-tale signs of intent when you look at the consumer's behavior as a whole, particularly across all his/her financial relationships.

For example, in a classic bust out case, you would see that the consumer, with pristine credit history, applies for more and more credit cards while maintaining a relatively low balance and utilization across all issuers. If you graph the number of credit cards and number of credit applications over time, you would see two hockey-stick lines. When the accounts go bad, they do so at almost the same time. This pattern is not always apparent at the time of origination, that's why it's important to monitor frequently for account review and fraud database alerts.

On the other hand, consumers with financial difficulties have different patterns. They might have more credit lines over time, but you would see that some credit lines may go delinquent while others don't. You might also see that consumers cure some lines after delinquencies…you can see their struggle of trying to pay.

Of course the intent "pattern" is not always clear. When dealing with fraudsters in fraud account management, even with the help of the fraud database, fraud trends and fraud alert, change their behaviors and use new techniques.

-- by Kristan Keelan

What do you think of when you hear the word “fraud”?  Someone stealing your personal identity?  Perhaps the recent news story of the five individuals indicted for gaining more than $4 million from 95,000 stolen credit card numbers?  It’s unlikely that small business fraud was at the top of your mind.   Yet, just like consumers, businesses face a broad- range of first- and third-party fraud behaviors, varying significantly in frequency, severity and complexity. Business-related fraud trends call for new fraud best practices to minimize fraud.

First let’s look at first-party fraud.  A first-party, or victimless, fraud profile is characterized by having some form of material misrepresentation (for example, misstating revenue figures on the application) by the business owner without  that owner’s intent or immediate capacity to pay the loan item.  Historically, during periods of economic downturn or misfortune, this type of fraud is more common.  This intuitively makes sense — individuals under extreme financial pressure are more likely to resort to desperate measures, such as misstating financial information on an application to obtain credit.  

Third-party commercial fraud occurs when a third party steals the identification details of a known business or business owner in order to open credit in the business victim’s name.  With creditors becoming more stringent with credit-granting policies on new accounts, we’re seeing seasoned fraudsters shift their focus on taking over existing business or business owner identities.

Overall, fraudsters seem to be migrating from consumer to commercial fraud.   I think one of the most common reasons for this is that commercial fraud doesn’t receive the same amount of attention as consumer fraud.  Thus, it’s become easier for fraudsters to slip under the radar by perpetrating their crimes through the commercial channel.   Also, keep in mind that businesses are often not seen as victims in the same way that consumers are.  For example, victimized businesses aren’t afforded the protections that consumers receive under identity theft laws, such as access to credit information.   These factors, coupled with the fact that business-to-business fraud is approximately three-to-ten times more “profitable” per occurrence than consumer fraud, play a role in leading fraudsters increasingly toward commercial fraud.
 

-- By Ken Pruett

Earlier this week I blogged about some of the other types of frauds that impact our customers such as “never pay” and “bust out” fraud. Today I want to touch a bit on some of the third party fraud scenarios that are often top of mind with our customers: identity theft; synthetic identities; and account takeover.  

Identity Theft
Identity theft usually occurs during the acquisition stage of the customer life cycle. Simply put, identity theft is the use of stolen identity information to fraudulently open up a new account.  These accounts do not have to be just credit card related. For example, there are instances of people using others identities to open up wireless phone and utilities accounts 

Recent fraud trends show this type of fraud is on the rise again after a decrease over the past several years.  A recent Experian study found that people who have better credit scores are more likely to have their identity stolen than those with very poor credit scores. It does seem logical that fraudsters would likely opt to steal an identity from someone with higher credit limits and available purchasing power.  This type of fraud gets the majority of media attention because it is the consumer who is often the victim (as opposed to a major corporation). 

Fraud changes over time and recent findings show that looking at data from a historical perspective is a good way to help prevent identity theft.  For example, if you see a phone number being used by multiple parties, this could be an indicator of a fraud ring in action.  Using these types of data elements can make your fraud models much more predictive and reduce your fraud referral rates. 

Synthetic Identities
Synthetic Identities are another acquisition fraud problem.  It is similar to identity theft, but the information used is fictitious in nature.  The fraud perpetrator may be taking pieces of information from a variety of parties to create a new identity.  Trade lines may be purchased from companies who act as middle men between good consumers with good credit and perpetrators who creating new identities.   This strategy allows the fraud perpetrator to quickly create a fictitious identity that looks like a real person with an active and good credit history. 

Most of the trade lines will be for authorized users only.  The perpetrator opens up a variety of accounts in a short period of time using the trade lines. When creditors try to collect, they can’t find the account owners because they never existed.  As Heather Grover mentioned in her blog, this fraud has leveled off in some areas and even decreased in others, but is probably still worth keeping an eye on.  One concern on which to focus especially is that these identities are sometimes used for bust out fraud. 

The best approach to predicting this type of fraud is using strong fraud models that incorporate a variety of non-credit and credit variables in the model development process.  These models look beyond the basic validation and verification of identity elements (such as name, address, and social security number), by leveraging additional attributes associated with a holistic identity -- such as inconsistent use of those identity elements.

Account Takeover
Another type of fraud that occurs during the account management period of the customer life cycle is account takeover fraud.  This type of fraud occurs when an individual uses a variety of methods to take over an account of another individual. This may be accomplished by changing online passwords, changing an address or even adding themselves as an authorized user to a credit card.  

Some customers have tools in place to try to prevent this, but social networking sites are making it easier to obtain personal information for many consumers.  For example, a person may have been asked to provide the answer to a challenge question such as the name of their high school as a means to properly identify them before gaining access to a banking account.  Today, this piece of information is often readily available on social networking sites making it easier for the fraud perpetrators to defeat these types of tools. 

It may be more useful to use out of wallet, or knowledge-based authentication and challenge tools that dynamically generate questions based on credit or public record data to avoid this type of fraud. 

-- by Heather Grover

In my previous blog, I covered top of mind issues that our clients are challenged with related to their risk based authentication efforts and fraud account management. My goal in this blog is to share many of the specific fraud trends we have seen in recent months, as well as those that you – our clients and the industry as a whole – are experiencing.  Management of risk and strategies to minimize fraud is on your mind.

1. Migration of fraud from Internet to call centers - and back again. Channel specific fraud is nothing new. Criminals prefer non-face-to-face channels because they can preserve anonymity, while increasing their number of attempts. The Internet has been long considered a risky channel, because many organizations have built defenses around transaction velocity checks, IP address matching and other tools. Once fraudsters were unable to pass through this channel, the call center became the new target, and path of least resistance. Not surprisingly, once the industry began to address the call center, fraud began to migrate, yet again. Increasingly we hear that the interception and compromise of online credentials due to keystroke loggers and other malware is on the rise.

2. Small business fraud on the rise. As the industry has built defenses in their consumer business, fraudsters have again migrated -- this time to commercial products. Historically, small business has not been a target for fraud, which is changing. We see and hear that, while similar to consumer fraud in many ways, small business fraud is often more difficult to detect many times due to “shell businesses” that are established.

3. Synthetic ID becoming less of an issue.  As lenders tighten their criteria, not only are they turning down those less likely to pay, but their higher standards are likely affecting Synthetic ID fraud, which many times creates identities with similar characteristics that mirror “thin file” consumers.

4. Family fraud continues. We have seen consumers using the identities of members of their family in an attempt to gain and draw down credit. These occurrences are nothing new, but   sadly this continues in the current economic environment. Desperate parents use their children’s identities to apply for new credit, or other family may use an elderly person’s dormant accounts with a goal of finding a short term lifeline in a bad credit situation.

5. Fraud increasing from specific geographic regions. Some areas are notorious for perpetrating fraud – not too long ago it was Nigeria and Russia. We have seen and are hearing that the new hot spots are Vietnam and other Eastern Europe countries that neighbor Russia.

6. Falsely claiming fraud. There has been an increase of consumers who claim fraud to avoid an account going into delinquency. Given the poor state of many consumers credit status, this pattern is not unexpected. The challenge many clients face is the limited ability to detect this occurrence. As a result, many clients are seeing an increase in fraud rates. This misclassification is masking what should be bad debt.

-- by Heather Grover

I’m often asked in various industry forums to give talks about, or opinions on, the latest fraud trends and fraud best practices. Let’s face it –  fraudsters are students of their craft and continue to study the latest defenses and adapt to controls that may be in place.

You may be surprised, then, to learn that our clients’ top-of-mind issues are not only how to fight the latest fraud trends, but how they can do so while maximizing use of automation, managing operational costs, and preserving customer experience -- all while meeting compliance requirements.

Many times, clients view these goals as being unique goals that do not affect one another. Not only can these be accomplished simultaneously, but, in my opinion, they can be considered causal. Let me explain.

By looking at fraud detection as its own goal, automation is not considered as a potential way to improve this metric. By applying analytics, or basic fraud risk scores, clients can easily incorporate many different potential risk factors into a single calculation without combing through various data elements and reports. This calculation or score can predict multiple fraud types and risks with less effort, than could a human manually, and subjectively reviewing specific results. Through an analytic score, good customers can be positively verified in an automated fashion; while only those with the most risky attributes can be routed for manual review. This allows expensive human resources and expertise to be used for only the most risky consumers.

Compliance requirements can also mandate specific procedures, resulting in arduous manual review processes. Many requirements (Patriot Act, Red Flag, eSignature) mandate verification of identity through match results. Automated decisioning based on these results (or analytic score) can automate this process – in turn, reducing operational expense.

While the above may seem to be an oversimplification or simple approach, I encourage you to consider how well you are addressing financial risk management.  How are you managing automation, operational costs, and compliance – while addressing fraud?