Synthetic Identity Fraud: The Evolving Threat to Identity Verification Systems

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Identity Verification Systems Struggle to Keep Up with Synthetic Fraud

The increasing use of artificial intelligence (AI) tools is making it easier for bad actors to create convincing fake identities, putting a strain on identity verification systems. A recent analysis of nearly 100 million identity verification transactions by Intellicheck found that 97.85% of IDs passed verification on average, but this number hides significant differences by industry and use case.

Industry Variations

In some sectors, such as retail alcohol sales, the failure rate was as high as 15.1%. This is particularly concerning, as fake and expired IDs are being used in routine customer transactions, from alcohol purchases to credit card applications. The problem is most prevalent in industries that rely heavily on fast onboarding and remote transactions, where identity checks rely on scanned documents and automated workflows.

Types of ID Failures

Intellicheck’s report separates failures into two main categories: expired IDs and failed IDs. Expired IDs can indicate operational issues, stolen credentials, or poor customer hygiene, while failed IDs can indicate attempted fraud or synthetic identity activity. The report lists several reasons an ID can fail, including barcodes missing hidden authorization data, barcode data that does not match the printed information on the license, and uploads that appear to be digital copies.

The researchers also tied the growth of synthetic identity fraud to the increasing use of AI tools, which can generate convincing fake documents that pass casual inspection. This has significant implications for organizations, as a single fake or synthetic identity can be monetized for tens of thousands of dollars before detection.

Targeted Industries

Online-only banks and financial institutions remain a major target for identity fraud due to access to credit, account funding, and cash movement. The report found that online-only retail banks recorded the highest rate of failed identity verification among financial institution categories. Businesses serving underbanked consumers, including check cashing, payday lending, subprime lending, and lease-to-own services, also showed elevated failure rates.

Importance of Tracking Failure Rates

The report highlights the need for identity verification teams to focus on leading indicators, rather than downstream financial losses. Intellicheck’s CEO, Bryan Lewis, emphasized the importance of tracking identity verification failure rates, rather than waiting for losses to materialize. He also pointed to first payment defaults as an example of how fraudsters can use fake identity credentials to open accounts and never make a payment.

High-Risk Transactions

Retail credit cards were also found to be a high-volume exposure, with a 1.6% failure rate. While this number may seem small, the report notes that the volume of retail credit card verifications reaches tens of millions of transactions, making it a major loss driver. Fraudsters use fake or stolen identities to open new accounts and request account lookups tied to existing customers.

Password Resets

The report also notes that password resets have become a growing identity verification use case, driven by account takeover threats tied to social media accounts. Intellicheck reported a 158% year-over-year increase in password reset verification transactions, with a failed identity verification rate of 2%.

Combating Synthetic Identity Fraud

To combat synthetic identity fraud, Lewis emphasized the need for layered controls and real-time decisioning. He also noted that the regulatory response will likely focus on document security and data protection expectations, with a growing scrutiny on how data is being collected, used, and protected.

Adapting to Evolving Fraud

As AI-driven fraud continues to evolve, it is clear that identity verification systems must adapt to keep up. This includes moving beyond templating and basic checks, and instead using multi-layered technology solutions that provide real-time results.