Many banks and lenders pride themselves on having low fraud losses. Often losses are characterized in terms of dollars as well as a percent of originations. The best lenders keep fraud losses to less than ten basis points as a percent of originations. The best of the best are less than five.
But what’s in most banks’ and lenders’ fraud bucket?
ID theft losses are for sure included. This is the most commonly tracked, traditional form of fraud. And, it’s very easy to identify. Typically, an ID theft victim calls a lender, says they received a request for payment on a loan they didn’t apply for, the claim is investigated and a fraud determination is made. If fraud is found, the losses related to that loan go in the fraud bucket.
But, only institutions with the most comprehensive risk management programs include the more subtle forms such as synthetic fraud in their bucket.
SentiLink CEO, Naftali Harris, explained on a recent roundtable why synthetic fraud is often not included in reported fraud losses at most companies.
“One of the challenges of the more modern and sophisticated forms of fraud is that, unlike traditional identity theft, the new kinds of fraud don’t smack you in the face and say, ‘hey, you have fraud.’ They are more subtle.
“If you look at synthetic fraud in particular, this is a case of where someone has invented a fake person. Because that fake person doesn’t actually exist, when an account is open and money is borrowed (using that identity), there’s no consumer victim who comes to you and says, ‘I’m the victim of identity theft.’ What ends up happening is the loan ends up charging off, a lender tries to collect on it, but can’t, and, if you don’t know what you’re looking for, then you’ll look at your fraud bucket and say, ‘I don’t have any fraud.’ But, you do, it’s just in a different loss category. As fraudsters get more sophisticated, a lot of those tactics fall in that same category.”
To make sure your financial institution is accurately tracking and adequately safeguarded against all types of fraud, perhaps the best question to pose to the fraud team is “What’s in our fraud bucket?”
