Our economy is largely cyclical—meaning that certain events and scenarios are bound to repeat themselves; though the timeframe for such events often varies. While we continue to experience our longest extended period of growth on record, there are many across the country and world who are anticipating the next recession. And given that it’s been more than a decade since the last financial downturn, it’s only a matter of time.
With the scale, severity and timelines for economy-changing events unknown, it’s imperative for organizations to adequately prepare their systems and procedures. That means updating risk management practices and refining collections approaches to minimize potential losses as a result of an economic slowdown. Organizations also need to consider the increased impact that fraud will have when our economy takes a hit.
Perhaps unsurprisingly, we tend to see high volumes of fraud during recessionary periods, particularly first-party fraud. Forced to rely on credit for every day expenses, some legitimate borrowers may take out loans without any intention of repaying them – greatly impacting an organization’s bottom line. Additionally, some individuals may opportunistically look to escape personal credit issues that arise during an economic downturn. They may resort to the misuse of a family member or friend’s information to commit fraud. In fact, according to Javelin Strategy & Research’s 2019 Identity Fraud Study, the rate of familiar fraud more than doubled last year, from 7% of fraud victims in 2017 to 15% in 2018.
That means financial institutions and retailers will experience both organic losses from the financial downturn, as well as losses inflicted from fraudulent behavior. The combination could have a meaningful impact on an organization’s bottom line.
Steps to take
Most organizations tend to identify certain aspects of the customer lifecycle as higher risk for fraud exposure and loss—specifically account openings—however it’s important for risk managers to take necessary precautions across all facets of the lifecycle. After all, there may be existing customers within their portfolios that have already begun the process to commit first-party fraud. A fraud mitigation strategy aimed solely at account openings would leave financial institutions and retailers susceptible to thousands of dollars per account lost.
Often, first-party fraudsters intentionally build a strong credit profile and demonstrate positive credit behavior to maximize the potential profit prior to “busting out”—the act of attempting to build a credit history with the intent of utilizing all available credit across multiple lending institutions, and eventually and purposefully defaulting. The process of nurturing synthetic identities usually follows a very similar fraud pattern: build a positive credit history, “bust out” with a large personal loan or purchase, and then disappear.
With that in mind, organizations need to make risk assessments that extend beyond a snapshot in time. More insight into the behaviors of an identity, such as the velocity at which a Social Security number is used, and the manner in which credit is being acquired and used can help organizations detect patterns of potentially fraudulent behavior. Additionally, organizations should perform regular checks of the accounts within their portfolios to identify existing customers who may develop fraudulent intent as they suffer the impacts of a downturn, as well as detect potential synthetic identities.
Simply put, institutions should ensure they are not relying solely on traditional and latent credit risk and third-party (identity theft) fraud risk assessments. Particular consideration should be given to advanced analytics that leverage a wide breadth and depth of identity and credit behavioral data, coupled with machine-learned models targeting first-party fraud, synthetic identity fraud, and identity theft across the customer lifecycle.
During times of economic distress, organizations need to have a plan for all scenarios, including fraud. First-party and familiar fraud, left undetected, can have a far-reaching impact on an organization’s ability to weather a downturn. As such, organizations should take proactive measures now, in advance of a slowdown, to implement a multi-layered approach that will effectively mitigate multiple types of fraudulent behavior.
Kathleen Peters is Experian’s Senior Vice President and Head of Fraud & Identity, North America