Application Fraud – From Identity Theft to First-Party Fraud

Identity theft, also known as third-party fraud losses, is just the tip of the application fraud iceberg. First-party fraud can be 10 times as much.

by Liz Lasher

October 30, 2017

Identity theft is growing at an exponential rate, leading to a rise in application fraud. Javelin Research reported a 17% rise in reported US identity theft victims, from 13.1 million to 15.4 million in just the last year. AITE Group projected the cost of fraudulent applications to be $28.6 billion.

Identity theft, also known as third-party fraud losses, is just the tip of the iceberg. First-party fraud losses - including true name and synthetic identity fraud - can peak to 10 times the size of third party fraud. Depending on factors including region, a bank’s risk appetite, product, channels, target market, maturity of fraud control measures, and portfolio size, first-party fraud comprises between 10-35% of bad debt.

Where is the rise in identity-based fraud coming from? Due to the surge in data breaches, Social Security numbers, mailing addresses, passwords, health history, even the name of our first pet is all for sale on the Dark Web. When you combine this phenomenon with the economic pressure applied on fraudsters to find a new cash cow after chip and signature plugged a gap in card-present fraud in the US, there is a perfect storm.

As a result, we are seeing fraud migrate from card fraud to paths of least resistance. These include card-not-present fraud, such as e-commerce; other products and payment channels such as wire fraud, real-time payments, and other products and channels that are either net-new or have less sophisticated controls; different regions; and most significantly, identity-based fraud in the forms of account takeover and application fraud.

At FICO, we have observed an increasing number of brute force application fraud attacks, where banks lose tens of millions of dollars in a matter of weeks. Financial institutions are coming to us for help because these attacks are becoming a norm, not the exception.

Keeping Up with the Criminals

Fraudsters exploit business changes. Attacks follow events as trivial as the launch of a marketing campaign or as significant as the introduction or expansion of new channels, the targeting of a new market segment, the launching a new product, etc. With the rapid digitization of our world and the consumer pressure for instantaneous decisions, the anonymity and facelessness of the online channel is particularly vulnerable.

The criminals are professionals who systematically test fraud countermeasures and are armed with a barrage of identities - whether true, manipulated, synthetic, or stolen. Fraudsters use technology to implement bot net attacks that allow rapid exploitation of fraud control weaknesses before they are fixed.

The Fraudsters Are Ready. Are You?

I will be exploring just identity-based fraud through a series of blog posts dedicated to fighting application fraud. There will be more on fraud trends, including a piece on the much-feared synthetic identity. There will be interviews with respected fraud and security practitioner, who will give their thoughts on best practice strategy and operational frameworks. There will be insights into analytical innovations that FICO is bringing to market, including how machine learning is used to fight application fraud. There will be an exploration of the data and capability ecosystem required to build a picture of a holistic, layered and integrated approach to stopping fraud at the front door.

Am I missing a topic? Feedback is welcome and I look forward to sharing with you more.

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FICO® Score High Achievers: Is Age the Only Factor?

FICO’s latest research on <a href="http://www.fico.com/en/blogs/risk-compliance/us-credit-quality-rising-the-beat-goes-on/" target="_blank">national FICO® Score distribution</a> shows that US credit quality continues to trend upwards, with an increasing number of consumers scoring in the highest scores ranges. Given that, we decided it was time to refresh our study on “<a href="http://www.fico.com/en/blogs/risk-compliance/infographic-what-does-a-high-credit-scorer-look-like/" target="_blank">FICO® Score high achievers</a>,” where we examine the credit behavioural profiles of consumers with higher credit scores. As expected, our latest study showed that older people generally have higher scores, as has been the case in our <a href="http://www.fico.com/en/blogs/risk-compliance/age-before-beauty-credit-worthiness-before-youth/" target="_blank">past research</a>. This is largely because they have trade lines that have been open longer, which leads to higher scores (assuming the trade lines are in good standing and all other things equal). The most credit savvy among you will remember that length of credit history accounts for roughly 15% of the overall <a href="http://www.myfico.com/CreditEducation/WhatsInYourScore.aspx" target="_blank">FICO® Score calculation</a>. But for younger consumers, it isn’t too helpful to say, “just wait until you are 50 years old, and that will fix things!” Thus, I decided to dive deeper with our analysis, including looking at the credit behavioural characteristics of younger consumers with high FICO® Scores. In this analysis, I looked at credit characteristics for the two highest score bands, 750-799 and 800-850, which have about 16% and 23% of the population, respectively. I further broke this down by looking at the characteristics of the youngest 15% in each group, which occurs at age 29 for the 750-799 group and 43 for the 800-850. We used FICO® Score 9 for our analysis, and examined typical variables of the categories that go into the make-up of the score. <a href="http://www.fico.com/en/blogs/wp-content/uploads/2016/10/FICO-Score-High-Achiever-table.png"><img class="alignnone size-full wp-image-29367" src="http://www.fico.com/en/blogs/wp-content/uploads/2016/10/FICO-Score-High-Achiever-table.png" alt="fico-score-high-achiever-table" width="715" height="747" /></a> Since there’s a lot to dissect in this chart, I’ll highlight a few findings that struck me: <ul> <li>Credit history. Higher scores are undoubtedly associated with a longer time on file. What’s striking is the higher average time on file for the 800+ group, both overall and for revolving accounts (the most common trade line). Clearly, it helps to start credit use early in life – but that’s not the sole determining factor for high scoring. The younger cohorts in both the 800+ and 750-799 groups have time on file medians significantly less than their older counterparts.</li> <li>New credit. High credit scorers do, in fact, pursue new credit. We see little variation in months since last trade line opening and last inquiry among all groups observed.</li> <li>Pay on time. As you might expect, the further in the past the delinquency, the higher the score – and that’s if a delinquency ever happened. 95% of the 800+ people and 72% of the 750-799 group have never been delinquent, which is a striking contrast to the 57% for the total population. The percentages for the younger groups are even higher, especially so for the 750-799ers. Collection items are also scarce for these high scorers. While 23% of the national population have collection items greater than $99, the figures are only 0.5% for the 800+ group and 3% for the 750-799 group. It is clear that, in conjunction with starting a credit file early, paying on time is a key trait of the FICO® Score high achiever.</li> <li>Balance and utilization. Finally, we look at how credit is being used, focusing on revolving product use. (Since most people only have one mortgage or one auto loan, variation in instalment product figures is minimal and driven by payment history, which is near perfect for high scorers, as we’ve seen.) FICO® Score high achievers tend to have more open revolving accounts. While the % active trades and utilization are generally lower, by no means do high scorers avoid the use of credit products. What drives the difference here is the amount of available revolving credit utilized. The 800+ group is roughly 1/4 of the national median, both in total and on their highest utilized card; they also have lower balances and more cards. The 750-799 group is more active and higher utilized, but still only at 2/3 of the national figures. The young 750-799 group compensate with lower revolving balances and, as a result, lower utilization, which is in line with what we see for the 800+ group.</li> <li>Benchmarks. I’d like to point out that while this study provides good benchmarks of the typical credit traits of the FICO® Score high achiever, individual credit profiles will vary widely. And keep in mind that when we sort groups of consumers as a whole by different behaviours, some results may look superficially odd. For example, the 800+ band has a longer median average open account time (128 months) than average revolving months on file (140 months).</li> </ul> So, what do we conclude? A huge takeaway is that high scorers don’t have too much in the way of serious delinquencies and negative public record data. In most respects, the young 800+ people are like their peer group. They really only differ markedly in their shorter credit history and higher non-mortgage balance, both of which are a function of life stage. Our results show that you don’t have to be a credit product hermit; these high scorers have more credit cards. The takeaway is to start credit activity early and maintain well-managed and moderate usage. In many ways, the young 750-799 people are more interesting because their age profile is much younger. Their credit characteristics differ more from their peer group, particularly in terms of length of credit history. They compensate by having almost pristine credit records and lower balances. Ultimately, 39% of US consumers are FICO® Score high achievers, which they accomplish by following common-sense credit practices. It ain’t rocket science!

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