The Next Wave of Identity Fraud: What the Research Revealed

June 28, 2017 Insights Editor

While attempting to maintain a frictionless customer experience, financial institutions note concerns with account takeover and application fraud.

The collision of two trends creates a big dilemma for executives at financial institutions (FI) of all sizes.

On the one hand, FIs face ever-increasing fraud risks, especially in online and mobile banking channels.

On the other hand, most FIs are committed to providing a smooth, frictionless user experience in their digital channels. That’s difficult to do when existing customers and new applicants get frustrated with fraud prevention measures.

To combat fraud losses, more transactions are referred to fraud analysts, increased challenge questions to authenticate customers, or the addition of other anti-fraud measures that cause delays that customers may find annoying.

How can FIs strengthen their fraud defenses without compromising the customers’ digital experience? Seeking answers, Equifax teamed with the Aite Group to research fraud challenges at U.S. FIs. Aite and Equifax presented findings in a recent webinar,  “Walking the Tightrope: Striking the Balance Between Fraud Prevention and UX.”

 Identity theft: Get ready for a new surge

 Thanks largely to poor password practices, organized crime rings are using password-breaking bots to exploit billions of stolen consumer credentials from numerous breaches comprised of commercial and consumer data. The bad guys know that a cracked password for a Twitter account may well work for that person’s credit card accounts as well.

The volume of stolen personal data represents a huge asset that criminals can cash in over many years. Consequently, the compromised records are fueling a big upswing in two forms of identity theft:

  • Account takeover (ATO) fraud—gaining control of a person’s existing account and executing fraudulent transactions that quickly exhaust available funds or credit lines.
  • Application fraud—using stolen information to open an account in another person’s name.

Asked to list the top fraud threats they face, respondents to the Aite Group research ranked ATO and application fraud sixth and seventh, respectively—well behind debit card fraud, check fraud, and credit card fraud.

So, why are we singling ATO and application fraud out for attention? The answer comes from a deeper dive into survey responses – especially those from larger FIs. ATO was listed in the “top three” challenges for 73% of large banks.  Similarly, 33% of those larger banks listed application fraud as a top challenge.

Aite analysts augment these findings with insights gained from their continual discussions with FIs and merchants. Some larger card issuers believe that for every dollar charged off for application fraud, another $6 to $10 is not recognized as fraud and written off as credit losses. Meanwhile, some large banks are experiencing up to 100% year-over-year increases (2015-2016) in ATO fraud.

There are two key reasons why large banks are experiencing more ATO and application fraud. First, large institutions are moving more aggressively into digital channels, providing more opportunities for fraudsters. Second, as organized crime rings shift their tactics away from counterfeiting magnetic cards, they tend to go after the biggest banks first with other forms of fraud. While ATO was noted as a more critical concern for larger FIs, smaller banks and credit unions should beware.   When it becomes harder for fraudsters to infiltrate larger companies, they tend to go downstream.

With sharp increases expected for ATO and application fraud, fraud prevention executives are in a grim position. In effect, they’re forced to wear two hats: the traditional hat of doing everything possible to thwart the bad guys, and a newer hat that holds them at least partially accountable for minimizing friction in the user experience.

How are fraud executives responding with their two-headed challenge? Here are some of the survey findings:

  • 58% of large institutions and 44% of small institutions plan to increase spending on identity fraud solutions.
  • 74% of FIs examine every new business case for its potential impact on the customer experience.
  • 68% of FIs have a cross-functional team working to improve the customer experience.

In short, as fraud evolves, FIs are responding in different ways. Clearly, the pain points and priorities differ by an institution’s size. It’s equally clear, though, that smaller institutions are not immune to challenges—and losses—larger institutions are facing.

For decades Equifax has worked with organizations to help them secure and authenticate across the customer lifecycle with an eye towards growth and an improved customer experience. Visit for details.

This is part 1 of a series of articles on the shifting nature of fraud. Revisit the blog for more.



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