Does Your Retail Fraud Problem Start with Account Creation?

New account fraud is surging, and despite the conventional wisdom that this type of fraud is mostly a problem for banks, retailers are in the crosshairs too. Due to AI tools that make it easier for criminals to synthesize identities from stolen customer data and manage them, banks and commerce are expected to lose close to $5 billion this year to this type of fraud. In fact, account creation fraud rates are growing fastest in the retail sector, with 44.7% of all digital retail account creations in 2023 marked as suspected fraud, according to a new TransUnion report.

The report’s authors describe account creation as the “highest risk stage in customer journey,” with fraudulent new accounts occurring more than four times as often as account takeover login fraud. So although retailers have historically focused on preventing payment and account takeover fraud, they now need to protect themselves from fake “franken-customers” that are hard to detect and becoming more common.

Preventing these fake customers from committing fraud — without making account creation frustrating for real customers — requires strategic use of intelligence and technology.

How New Account Fraud Works

The ongoing flood of stolen consumer data provides the raw material that criminals need to construct false identities. Data breaches have been a problem for many years, but 2023 was the worst yet for U.S. consumers. According to the National Identity Theft Center, 353 million Americans had their data exposed last year – a new record.

Rather than use the data to steal complete individual identities, criminals combine elements from various stolen profiles – for example, a name from one, a billing address from another and payment data from a third. This approach creates identities that look real enough to fool many fraud prevention and identity verification tools. It also makes this kind of fraud harder to detect than outright identity theft.

The creators of these synthetic identities can then open accounts with banks and retailers, wait for credit offers, spend the funds and vanish. This would be a lot of work if not for AI that now makes it easy to synthesize lots of identities quickly and automate the account creation process. It’s now possible for one criminal or group to manage many such identities and accounts.

Why Fraudsters Target Retail Now

Opening fake accounts with retailers gives criminals opportunities around credit, control and identity cleanup.

We’ve already touched on the credit aspect. Fraudsters can use the customer account to make a few legitimate purchases and wait for the retailer to extend a credit offer. They can also use this purchase history to establish an identity history that makes them a more appealing prospect to banks and lenders.

The TransUnion report also noted that it’s easy for criminals to control accounts that they create with synthetic identities. Unlike account takeover fraud, there’s no real account holder who might report a hijacked account, so there’s less risk of losing access.

Although it may sound bizarre, some synthetic identity fraudsters also use their fake retail accounts to make false fraud reports. TransUnion calls this credit-washing: To extend the useful lives and credit lines of the identities they synthesize, some criminals make purchases and then dispute them.

The Lasting Impact of Retail Account Creation Fraud

Chargebacks are expensive for retailers, whether they’re initiated by real people or on behalf of synthetic customers. In addition to the immediate costs of fraud, retailers can suffer longer-term reputational damage when consumers find out that their data has been stolen or used to commit fraud.

For example, in ClearSale’s most recent five-country survey of consumer attitudes about ecommerce, fraud and customer experience, 84% said they would never shop again with a site that allowed fraud using their credit card. Another study on the impact of data breaches found that more than 40% of data breach victims quit doing business with the brand that lost their data, and they tell friends and family to steer clear of the brand too.

Fake customer accounts waste marketing resources as well. Personalizing messaging for synthetic customers is an investment that won’t pay off in terms of lifetime value. Those customers disappear when the credit they falsely acquired runs out or the payment data they stole is reported.

Account Creation that Works for Retailers and Real Customers

Retailers can protect their revenue, reputation and customers from account creation fraud with strategies that are similar to those they may already use for transaction fraud prevention. As with checkout fraud prevention, the goal of account creation fraud security is to detect fraudulent customers without requiring all your customers to go through time-consuming extra authentication steps like two-factor authentication.

The key is using AI to fight AI-enabled fraud, similar to the way it’s already used for payment fraud prevention in retail. AI models trained on consumer data can detect patterns and discrepancies in identity data that can indicate fake customers, so those account creations can be blocked or sent for review before approval. AI can also match the speed and scale at which criminals create fake identities and use them to open retail accounts, so retailers aren’t overwhelmed by fake registrations. 

If using AI to fight AI feels like the next step in an ongoing technology race between retailers and fraudsters, it is. Fraudsters have always adapted new technologies (like botnets, magnetic card readers and swappable SIM cards) to further their schemes. Now, AI-powered account creation fraud is here to stay, so adaptation with AI is how retailers can keep these fake customers out of their systems while welcoming real consumers.

Original article at: https://www.retailtouchpoints.com/features/executive-viewpoints/does-your-retail-fraud-problem-start-with-account-creation