Credit privacy numbers and the surge in US identity fraud

The use of Credit Privacy Numbers (CPNs) has grown increasingly popular across the United States, especially among individuals looking to protect their financial data. Originally marketed as a legitimate way to safeguard one’s credit profile, CPNs have become an alarming driver of synthetic identity fraud, posing significant risks to the financial sector.

This boom in synthetic identities has now reached levels that threaten financial stability, with losses for businesses, lenders, and consumers anticipated to rise sharply. Industry experts are calling for immediate action to mitigate the risks associated with synthetic identities, warning of severe consequences if this issue remains unaddressed.

The origins of credit privacy numbers

CPNs first gained traction in the early 2000s as credit repair companies began marketing them as tools for enhancing privacy. By using CPNs, individuals could theoretically open new credit accounts and establish a fresh credit profile without disclosing their actual Social Security numbers. This approach appealed to many consumers seeking privacy and to those hoping to rebuild credit histories unencumbered by past financial missteps.

The widespread promotion of CPNs has now paved the way for synthetic identity creation. Fraudsters blend stolen Social Security numbers with fabricated personal details to form entirely new identities, which they then use to apply for credit.

Unlike traditional identity theft, which involves impersonating a real individual, synthetic identity fraud creates an entirely fictional person who can acquire financial products under a false name and history. This type of fraud has grown so pervasive that it now accounts for billions in annual losses for US lenders.

A recent study by Datos Insights found that synthetic identity scams cost the industry approximately $2.4 billion in unsecured credit debt, and these losses are projected to soar as fraudsters exploit gaps in digital verification systems.

CPN-friendly fintech platforms

Fintech companies have revolutionized the finance industry by providing innovative credit-building solutions and democratizing access to financial services. Platforms such as Self, Kikoff, TomoCredit, and Chime cater to consumers looking to establish or improve credit with fewer barriers than traditional banks.

These services enable individuals to create credit profiles, often without stringent credit checks. While such accessibility has helped many consumers, it has also created opportunities for those using CPNs to establish synthetic identities. Fraudsters can quickly build synthetic profiles by opening accounts on these platforms, which then appear legitimate based on credit activity but are entirely fictitious.

Mary Ann Miller, Vice President at Prove, observed a significant rise in synthetic identity cases, particularly since the pandemic, when digital finance saw exponential growth. The use of CPNs on fintech platforms to build fraudulent credit histories has become increasingly difficult to trace, as these synthetic identities do not correspond to any single, identifiable person but rather blend authentic and invented data.

TransUnion, a major credit reporting agency, has identified synthetic identity fraud as a pressing concern, with losses due to synthetic identities exceeding $3.2 billion in just the first six months of 2024. Some estimates suggest that synthetic identity loss will top $23 billion by 2030 if trends continue unchecked. Fintechs now face mounting pressure to strengthen identity verification and fraud detection to counteract this misuse of their platforms.

Tackling the synthetic identity crisis

To combat the synthetic identity crisis, experts agree that a multifaceted approach is necessary, combining consumer education, advanced verification methods, and regulatory oversight. Financial institutions are increasingly recognizing that educating the public about the risks associated with CPNs is essential to reducing synthetic identity fraud.

Many consumers are unaware of the potential criminal implications of using a CPN for credit applications. What may appear as a harmless way to protect privacy can, in reality, constitute identity fraud, with possible legal repercussions. Financial institutions must, therefore, prioritize educating consumers on these risks.

To improve verification, banks and fintechs are implementing advanced technologies such as artificial intelligence (AI) and machine learning to detect patterns indicative of synthetic identities. AI-powered systems can analyze and identify anomalies within credit applications, allowing banks to flag potential synthetic identities before accounts are opened.

Another layer of protection involves biometrics, such as facial or voice recognition, which can provide higher accuracy in verifying individual identities. These solutions aim to ensure that a person’s unique physical characteristics correspond to the identity provided, making it harder for synthetic profiles to evade detection.

Steve Lenderman, Head of Fraud Solutions at Quantexa, stresses that consumer education is equally critical to reducing the use of CPNs. By informing consumers that using a CPN to obtain credit constitutes fraud, institutions can help prevent synthetic identity creation at the source.

Law enforcement officials, like Sgt. Darren Schlosser, reinforce this stance, noting that while CPNs are often advertised as safe privacy tools, they are considered fraudulent by authorities and carry legal consequences. Therefore, education campaigns and early intervention targeting consumers, especially young adults, could play a vital role in preventing misuse and curbing synthetic identity fraud.

Building a safer financial future

Addressing the synthetic identity crisis requires robust collaboration between banks, fintechs, and regulatory bodies. Together, they can implement standardized verification protocols and improve data-sharing mechanisms, which will enable faster identification of suspicious profiles.

As synthetic identity theft becomes more sophisticated, the finance sector must stay one step ahead, leveraging emerging technologies to outpace fraudsters. Machine learning algorithms, predictive analytics, and biometric verification offer promising solutions, each playing a role in strengthening identity verification.

The rise in synthetic identity fraud has prompted fintechs and traditional banks alike to rethink their security protocols. For example, some institutions now require dual verification layers or physical document verification for higher-risk accounts. Others are investing in real-time fraud detection systems, which monitor transactional behaviors and flag unusual patterns that may indicate synthetic identity use.

By adopting these tools, banks and fintechs can help curb synthetic identity fraud before it infiltrates the system. Furthermore, biometric authentication adds another level of security by linking financial accounts to physical characteristics unique to each individual, thereby making synthetic fraud much more difficult to execute.

Experts also highlight the need for regulatory clarity surrounding CPNs. Without clear guidelines, CPNs exist in a legal gray area, making it easier for scammers to exploit. Regulatory bodies could issue clearer guidelines prohibiting the use of CPNs in credit applications and establish penalties for fraudulent behavior. Such measures could deter those tempted to create synthetic identities by clarifying the illegality and potential repercussions associated with using CPNs.

Actions to combat synthetic identity fraud

In conclusion, synthetic identity fraud driven by Credit Privacy Numbers represents a significant threat to the US financial system, with potential consequences for businesses, consumers, and lenders.

As this crisis deepens, financial institutions, fintech companies, regulatory bodies, and consumers themselves must take coordinated action. Enhanced verification protocols, consumer education, and regulatory measures will play critical roles in mitigating the risks posed by synthetic identities.

The risks of synthetic identity fraud extend beyond monetary losses; they also undermine the stability and reliability of the financial ecosystem. As experts emphasize, failing to address this growing issue could result in lasting damage to consumer trust in financial institutions. Therefore, stakeholders across the financial landscape must prioritize education, technological advancements, and collaborative efforts to secure the financial future.

The time for action is now. Without decisive intervention, the consequences of synthetic identity fraud could be catastrophic, leading to billions in losses and a severe erosion of consumer confidence in financial systems.

The finance sector must recognize the urgency of this issue and take proactive steps to build a safer, more trustworthy environment for all. Through collaborative efforts and innovative approaches, stakeholders can work together to combat synthetic identity fraud and protect the integrity of the US financial system.