Safeguarding the Retail Industry From Synthetic ID Fraud

In the retail and e-commerce landscape, the surge of synthetic shoppers poses a challenge for retailers. In fact, 50 percent of businesses have reported growth in synthetic identity fraud (SIF), according to AuthenticID’s 2024 State of Identity Fraud Report. SIF — when individuals use stolen personal information, such as Social Security numbers, to create fake identities and commit financial fraud — exposes retailers to shoppers using fraudulent credit cards. The persistent rise of SIF, fueled by an increase in data breaches that steal unsuspecting individuals’ personal information, highlights the need for solutions to strengthen defenses within the retail sector, especially if a retailer offers a branded credit card.

With the proliferation of online transactions and technology advancements, detecting and preventing SIF has become increasingly important. In navigating this threat landscape, retailers must understand the nuances of SIF and implement comprehensive strategies to mitigate its impact effectively.

Understanding Synthetic Identity Fraud

SIF manifests in two forms: manipulated and manufactured synthetic identities. In the manipulated form, individuals subtly alter their genuine personal information to create a new identity, often to conceal poor credit history. For example, by utilizing credit repair companies, individuals can erase adverse credit histories and assume a new identity using a credit profile number (CPN), which looks similar to a Social Security number. However, CPNs aren't what they seem. CPN sellers may ask applicants to lie on their applications by offering fake phone numbers, addresses and emails. As a result, using a CPN can be considered identity theft and is a federal crime if used on a credit application.

Conversely, manufactured synthetic identities combine stolen personal information from multiple people, often sourced from the dark web, to create entirely new fake identities.

Impacts on the Retail Sector

Synthetic fraud poses a significant threat to the retail industry, particularly online shopping. The anonymity and convenience of online transactions provide a cover in which fraudulent activities can flourish. Specifically in the case of retail, synthetic shoppers exploit stolen or fabricated credit card information to make fraudulent purchases, bypassing retailers' security measures.

Additionally, the rise of buy now, pay later (BNPL) services has presented a new avenue for fraudsters. They can dupe the system by only making a smaller on-time payment and still keeping the item, or making the full payments with someone else’s credit.

Mitigating Synthetic Identity Fraud: Strategies for Retailers

To combat the escalating threat of SIF, retailers must adopt proactive measures aimed at detection and prevention. Real-time identity authentication systems powered by advanced artificial intelligence algorithms and machine learning models are valuable tools in identifying whether a person is who they truly are, further mitigating fraudulent transactions. By leveraging robust identity verification and payment card authentication solutions, such as biometric authentication, retailers can enhance their defenses against synthetic shoppers. Retailers can also implement protocols that block fraudsters from making purchases again by adding them to a watchlist that uses biometric data to confirm identities.

Additionally, industry stakeholders, including retailers, financial institutions and regulatory bodies, often do not communicate to implement new fraud regulations. This lack of communication makes it crucial that these stakeholders develop comprehensive strategies, such as sharing data on consumers and their transactions, to combat synthetic fraud. Sharing data insights can facilitate the early detection of fraudulent patterns and enable swift responses to emerging threats.

As the retail landscape continues to evolve, the fight against SIF must remain a top priority for the industry. Embracing proactive risk mitigation strategies is essential in protecting the integrity of the retail sector and preserving consumer trust. By staying vigilant and flexible in the face of evolving threats, retailers can mitigate the impact of synthetic fraud.

Blair Cohen is the founder and president of AuthenticID, a disruptive and transformational identity proofing and fraud prevention technology company.