How to Turn Identity Fraud Prevention into a Competitive Advantage

Identity fraud is an increasing challenge for financial institutions, but effective precautions should do more than mitigate risk. A secure, digital onboarding process has the potential to help kick start growth.

Identity fraud is an ongoing issue for banking institutions, but advancements in new technologies, like GenAI, are ushering in a brave new world for security teams. Scammers are using the tech to beat traditional fraud-deterrent systems, and forcing institutions to face new security threats – as well as opportunities for growth.

Some of the most common schemes – like “bust-out fraud” that involves applying for a line of credit with false identification and no intention of repaying debts – are now costing financial institutions billions of dollars a year and eroding customer trust. More than half of U.S. banks experienced $500,000 in direct fraud losses last year, while about a quarter of respondents reported losing over $1 million, according to recent research from Alloy.

Fraudulent attempts and attacks are increasingly sophisticated and are pushing executives to shift priorities from simple transaction-based security models to identity-based systems, according to the report. Fraud remained a top risk for banks with 57% of responding financial institutions hit with an increase in attacks last year.

“The concept is not new,” says Sara Seguin, principal advisor for fraud and identity risk at Alloy. “What we’re seeing over the past few years is an explosive increase in the volume of attacks and attempts.” According to the research, four in 10 banks dealt with more than 1,000 fraud attempts last year.

Sara Sequin will be a featured speaker at The Financial Brand Forum 2024, May 20-22 in Las Vegas. Her breakout session, “Digital Identity Verification: A Competitive Advantage for Banks & Credit Unions“, will teach how to solve for identity risk across the customer lifecycle, and how banks can use verified customer data to offer tailored financial products and services, increasing cross-selling and upselling opportunities. See the Forum website for more info on her session, and details on the full program.

The battle for identity fraud took on a new dimension during the height of the pandemic when criminals set their targets on government programs like PPP loans and pandemic relief payments. Personal identifiable information became readily available, Seguin says, and when sensitive consumer data is easy to obtain, fraudsters have a field day.

“It goes back to you,” says Seguin. “Did you know who you were letting in the front door?”

Fraud Prevention Can Create Better Experiences

While identity fraud is an increasing challenge for financial institutions, effective identity verification should do more than mitigate fraud, Seguin says. It can also help kick start growth.

A secure, digital onboarding process has the potential to actually turn into a competitive advantage that attracts new customers. Investments in onboarding can make the journey safer and more enjoyable for the user.

“If you onboard someone faster, they can start using the product faster and that’s what the business wants,” Seguin says. In fact, every touch point continues to build the client relationship, and at the same time can be used to safeguard the relationship.

“It’s not just, ‘We onboarded them, they’re good to go,'” Seguin says. “Identity fraud isn’t just one and done.”

Financial institutions are making significant investments in fraud prevention, according to Alloy, which queried 450 decision-makers in the U.S. and the U.K during October and November. Compared with prior research, more survey respondents said they were interested in investing in identity risk software, signaling a growing awareness about preventing fraud during onboarding.

While prevention is largely focused on transaction monitoring, many are zeroing in on customer identity to help steer decision-making. The research suggests financial institutions must streamline the authentication process while improving the overall client experience. “If you don’t have an overall view of the client, it becomes very challenging to know who you’re doing business with,” Seguin says.

“Identity fraud isn’t just one and done.”
— Sara Sequin

A dramatic increase in the volume of transactions is still the most common tell-tale sign of fraud and increased 6% year over year, according to Alloy. The use of inconsistent personally identifiable information and increases in the volume of completed applications were also common giveaways.

But that may be changing. Fraudsters are increasingly turning to more sophisticated attack methods, like identity theft, as the use of AI in fraud prevention increases, the survey found.

“If you are not performing identity verification and where you don’t have a robust identity verification program, then you may be allowing fraudsters in and ultimately you could be taking the loss,” Seguin says.

Deter Fraud with Alternative Data Points

Financial services companies are now using broader data sets to go beyond traditional FICO credit scores to personalize financial products and help identify fraudsters. By analyzing additional customer data points – like home ownership, education, rent and utility-bill payment histories – fintech companies are offering new ways to combat fraud. These alternate data sources go beyond what has been used historically and can help pinpoint the gaps in a person’s identity.

“We are certainly seeing banks moving towards newer solutions,” Seguin says.

New information from a mobile phone or device that customers are using can now provide clues about identity risk. If the application is being filled out on a cell phone, financial institutions can ask where the phone is located and does that match with other records, beyond the identity of the person. Banks can also track the history of the device and detect how many accounts have been opened using it, Seguin says.

“It starts to set a risk as to who this person is beyond the elements of this social security number,” she says.

Some data vendors are now verifying home ownership, and how long prospective customers have owned a property, as an additional resource. An applicant’s highest form of education can also add to the overall picture, she says.

Dig deeper into data analysis strategies:

Fraud Technology Can Boost Personalization

The ability to use AI to leverage data in real-time is quickly becoming a top priority for companies that are looking to stop potential fraudsters. In addition, the same technology can help provide personalized experiences for customers, smooth onboarding processes and help institutions cross-sell products.

A more holistic understanding of the risk posed by potential customers can also help with personalized offerings. Based on what the bank can see, institutions can offer products that not only fit into the customer life cycle, but something that ultimately makes sense from an identity perspective.

For example, customers that are identified as medium risk may be catered to differently than those deemed as higher risk, Seguin says. Banks can keep higher risk customers in certain low-risk products, or maybe turn them away all together.

“Maybe that isn’t someone you want to offer a credit card to in 30 days?” she says.

The importance of real-time transaction and suggestions also satisfies the customer need for instant gratification, Seguin says. “They want that real-time, veryquick, one-and-done answers, and that’s where the identity component becomes important.”

Through instant interactions with clients, banks can create better customer service experiences that boost customer loyalty and satisfaction, and the possibility for increased revenue through product recommendations.

“For the bank, it helps open the account immediately versus waiting a few days and the consumer going somewhere else,” she says.

Sean Allocca is an award-winning journalist with more than 15 years of experience. Most recently, he was Editor-in-Chief of, overseeing the company’s content strategy and long-term editorial goals. He was also deputy managing editor at InvestmentNews, an editor for the wealth management publication Financial Planning, and editor of CFO magazine. He has a M.A. in business communication from Fordham University and a B.A. in journalism from Loyola University, Maryland.

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