Synthetic identity fraud has emerged as one of the most dangerous and costly challenges for financial institutions in 2024. This rapidly growing threat is expected to drive billions of dollars in losses, placing an enormous strain on businesses and consumers alike. To effectively combat it, financial institutions must adopt advanced fraud detection tools, implement stringent KYC/AML compliance processes, and leverage cutting-edge technology.

What is Synthetic Identity Fraud?

Synthetic identity fraud involves creating fake identities using actual and fictitious personal information. Fraudsters typically use legitimate Social Security numbers (SSNs) — often those of minors, deceased individuals, or stolen from data breaches — and pair them with false names, dates of birth, or addresses. This allows them to open fraudulent bank accounts, obtain credit cards, or secure loans under the guise of a legitimate identity.

Unlike traditional identity theft, where an existing person’s possession is stolen and misused, synthetic identity fraud creates a new, fabricated identity, making it significantly more challenging to detect. Fraudsters take advantage of gaps in the identity verification processes, often exploiting weaknesses in credit bureaus and financial systems.

Why Synthetic Identity Fraud is the Biggest Financial Risk in 2024

The alarming rise in synthetic identity fraud can be attributed to several factors. First, the sheer scale of digital transactions and online services has made it easier for criminals to create and manipulate synthetic identities. In a post-pandemic world, where digital banking has become the norm, financial institutions find it increasingly difficult to distinguish between real and fake identities.

This type of fraud remains undetected for extended periods because synthetic identities can build up a legitimate credit history over time. Fraudsters open accounts, make on-time payments and increase credit lines before eventually defaulting, leaving the financial institution with significant losses. As reported by TransUnion, synthetic identities can result in up to three times the losses of traditional fraud cases.

The accessibility of tools on the dark web and sophisticated methods to bypass verification checks have made it easier for criminals to perpetrate synthetic identity fraud. As a result, financial institutions must adopt a more comprehensive fraud prevention approach to stay ahead.

The Financial Impact of Synthetic Identity Fraud

The financial toll of synthetic identity fraud is staggering. By 2024, experts estimate that this fraud could account for up to 20% of all credit card fraud in the United States. As fraudsters become more adept at evading detection, the total losses could reach billions annually.

Synthetic identity fraud poses long-term risks for banks and financial institutions. Fraudsters who default on loans or max out credit cards leave a trail of bad debt, which is often challenging to recover. Moreover, legitimate SSN holders, especially minors, could see their credit histories damaged before adulthood.

How Financial Institutions Can Mitigate Synthetic Identity Fraud

Combating synthetic identity fraud requires a proactive, multi-layered approach. Financial institutions must focus on enhancing KYC (Know Your Customer) and AML (Anti-Money Laundering) compliance while leveraging the latest technological advancements in fraud detection. Here are some effective strategies:

1. Enhanced Identity Verification

One of the most effective ways to combat synthetic identity fraud is to use advanced AI-powered verification tools. These tools can analyze behavioral patterns, biometric data, and cross-referenced public records to detect inconsistencies that indicate synthetic identities. Biometric authentication, such as fingerprint or facial recognition, is especially useful for verifying user identities in real-time.

2. Cross-referencing public and Proprietary Data

Robust identity verification systems should incorporate cross-referencing across various databases. Verifying Social Security numbers, utility accounts, and employment records can help ensure an identity's legitimacy. Institutions should also rely on public databases to track deceased SSNs and prevent their misuse.

3. Continuous Account Monitoring

Fraudsters often let synthetic identities remain dormant for a period before exploiting them. To prevent this, financial institutions should implement continuous monitoring of accounts, especially those flagged as high-risk. AI-driven monitoring tools can detect suspicious activities in real time, such as sudden changes in account behavior or the appearance of synthetic data patterns.

4. Multi-Factor Authentication (MFA)

Incorporating Multi-Factor Authentication adds an extra layer of security, making it more difficult for fraudsters to access financial services using synthetic identities. Banks can significantly reduce the likelihood of fraudulent account access by requiring additional verification steps — such as one-time passcodes, email confirmations, or biometric scans.

5. Implementing Strong KYC/AML Frameworks

Financial institutions must strengthen their KYC and AML protocols to close the gaps that fraudsters often exploit. This includes rigorous onboarding procedures that require comprehensive identity documentation and ongoing monitoring of customer accounts to flag any unusual activity.

Technologies Empowering Financial Institutions in 2024

Advancements in technology are playing a crucial role in helping financial institutions defend against synthetic identity fraud. The following innovations are proving invaluable:

• Artificial Intelligence and Machine Learning: AI and machine learning algorithms can analyze vast amounts of data in real time to detect anomalies and flag potential fraud. These technologies are particularly adept at identifying complex patterns of synthetic fraud that traditional systems might miss.
• Risk Assessment: can offer a decentralized and transparent method of verifying identities. By storing immutable records of social data, we can provide an additional layer of security and prevent fraudsters from tampering with identity information.
• Biometric Authentication: As mentioned earlier, biometrics such as fingerprints, facial recognition, and even voice recognition are becoming critical tools in fighting synthetic identity fraud. These methods provide a unique and difficult-to-fake layer of verification that complements traditional identification techniques.

As synthetic identity fraud continues to evolve, it represents a significant threat to financial institutions in 2024. Banks, credit unions, and other financial entities must proactively strengthen their fraud detection capabilities by adopting advanced KYC/AML compliance, leveraging AI and biometric technology, and continuously monitoring accounts for suspicious activity. By doing so, institutions can mitigate the risk of synthetic identity fraud and safeguard their businesses and customers.