A New Threat for Retailers: The Rise of the Synthetic Shopper
While the rapid rise of e-commerce has generated additional revenue for many retailers, it’s also brought additional challenges. The increased fraud risk and merchant liability for online transactions create a cautious environment filled with costly review processes, poor customer experiences, and lost sales. Merchant concerns are not unfounded, as global e-commerce fraud losses are projected to exceed $48 billion in 2023, according to Juniper Research.
Addressing fraud challenges is top of mind for e-commerce merchants, with 93 percent of companies having a mid-to-high concern for fraud and 81 percent stating that their worries about fraud have increased over the past 12 months, according to Experian’s 2022 Global Identity and Fraud Report.
Against this landscape, rising risks from synthetic identity fraud have captured the attention of the industry. The Federal Reserve cites synthetic identity fraud as the fastest-growing type of financial crime in the United States, and as it becomes more sophisticated, e-commerce retailers need to be prepared.
Historically, e-commerce retailers shared the same experience as other businesses confronting synthetic identity fraud. Criminals create synthetic identities or “Frankenstein IDs” comprised of both real and false information. For example, a fraudster may combine real personal information like a stolen social security number with a fake name, home address and date of birth to create an entirely new identity that doesn’t actually exist.
With a new identity created, fraudsters apply for small loans or credit cards and begin making payments and building a credit history. Over time, they request higher credit limits and establish additional fraudulent accounts. After several months of nurturing their synthetic identities, the fraudsters will “bust out,” or max out their available credit and disappear, leaving lenders and retailers with the loss. While it's a lucrative form of fraud, it does require time and discipline to execute.
However, a new form of synthetic identity fraud is becoming more concerning to e-commerce retailers — the synthetic shopper.
Introducing the Synthetic Shopper — Fake Shoppers Using Real Credit
In its latest form, synthetic identity fraud has merged with an old favorite — stolen payment cards. Instead of creating and nurturing synthetic identities to become credit worthy, the criminal only needs to successfully create an online shopper profile with an e-commerce retailer. Instead of undertaking the tedious and time-consuming effort to establish credit using the synthetic identity, they simply go to the dark web and buy compromised card information to attach to their synthetic shopper.
It's simple and easily automated, using bot scripts to fill out shopper profiles. The only barrier that remains for the fraudster is to outsmart fraud transaction risk and detection controls. That might sound like a formidable challenge, but it really depends on the individual merchant. Some retailers relax controls to manage seasonal volume, adjust purchase size thresholds, and look at the tenure of the shopper’s profile; meanwhile, fraudsters take advantage. Fraudsters will test the waters to see what they can successfully get away with purchasing and repeat the process across a number of merchants.
Addressing E-Commerce Synthetic Identity Fraud With Advanced Data and Technology
More than ever, retailers need innovative solutions that not only help address fraud, but also prevent it without disrupting the consumer experience. It's important to leverage a solution that can improve e-commerce transaction security to increase sales and transaction fraud rates. A well-rounded solution does this by combining identity verification technology with payment card information.
When delivered in real time, the process can manage costs and risks while improving customer experience for new shoppers and guest checkout. The right solution will also function as an offline process, where shopper profiles can be analyzed to identify high-risk combinations of identities and payment cards and, more importantly, define the majority of “safe shoppers” whose online experiences can be further streamlined to build long-term loyalty.
As the threat of synthetic identity fraud grows, the potential for loss is significant. A proactive approach to fraud prevention will allow e-commerce retailers to protect themselves from future fraud attacks. By leveraging a fraud solution that uses advanced data and analytics, retailers can better verify identities, increase legitimate sales, and mitigate losses while also providing a frictionless customer experience.
Chris Ryan is a senior fraud solutions consultant, decision analytics North America at Experian, the world’s leading global information services company.
Related story: Two Sides of the Identity Equation for Retailers
Christopher Ryan is senior fraud solutions consultant, decision analytics, North America, at Experian. He delivers expertise that helps clients make the most from data, technology and investigative resources to combat and mitigate fraud risks across the industries that Experian serves. Ryan provides clients with strategies that reduce losses attributable to fraudulent activity. He has an impressive track record of stopping fraud in retail banking, auto lending, deposits, consumer and student lending sectors, and government identity proofing. Ryan is a subject matter expert in consumer identity verification, fraud scoring and knowledge-based authentication. His expertise is his ability to understand fraud issues and how they impact customer acquisition, customer management and collections. He routinely helps clients review workflow processes, analyze redundancies and identify opportunities for process improvements. Ryan recognizes the importance of products and services that limit fraud losses, balancing expense and the customer impact that can result from trying to prevent fraud.