Outstanding balances of suspected synthetic fraud surpassed $1B last year, and the number is expected to rise. Startups are cropping up to help banks and merchants tackle the issue.
As consumers increasingly transact and shop online, e-commerce merchants are facing a growing challenge: synthetic identity fraud.
Synthetic identities are fake identities created by combining real and fictional identification details. Fraud is committed when a synthetic identity is approved for a line of credit, spends the money, and then disappears, leaving behind outstanding balances. As of Q2’18, outstanding balances of suspected synthetic fraud surpassed $1B, according to a TransUnion report.
For merchants and banks, fraud is a double-edged sword. On the one hand, actual fraudulent activity leads to increased costs and lost inventory. On the other hand, “false positives” can lead to lower revenues — if a customer’s transaction is incorrectly flagged, the purchase is halted and revenue is lost.
Startups are now helping merchants and banks correctly flag fraud and avoid false positives. Below, we take a closer look at a crop of well-funded companies using user and entity behavior analytics (UEBA) and machine learning to fight synthetic identity fraud.