Earlier this year, a colleague wrote a Take on Payments post about synthetic identity fraud. Throughout the year, we've found ourselves talking often with representatives from law enforcement and financial institutions about the growth of this particular type of fraud. There are different estimates that try to catalogue the damage, but one that strikes me is that synthetic identity fraud could account for as much as 5 percent of uncollected debt and be responsible for approximately 20 percent of credit losses.
A major challenge to mitigating this fraud is the difficulty financial institutions and other lenders have in confirming that a social security number (SSN) being presented actually belongs with the name of the person presenting it and that their date of birth actually matches the SSN. Prior to June 2011, the first three numbers of the SSN provided geographical clues to the number holder's birth state, which allowed for some basic verification, but the Social Security Administration (SSA) now randomizes all numbers making this minimal form of verification impossible for any SSN issued after this date. Currently, the SSN verification process requires that the requester complete a wet signature consent form that is submitted in hard copy to the SSA. Hardly a speedy process in a day and age when financial institutions and lenders are striving to make many lending decisions in hours or minutes, not days! But change from the SSA is in the air.
On June 7, the SSA published a notice to the Federal Register
announcing initial enrollment for a new electronic consent-based SSN verification service. The notice is full of details about this program and its initial enrollment is open to all financial institutions (FI) and FI service providers as defined by the SSA. Participation in the pilot program requires that enrollees pay an initial administrative fee followed by volume-based pricing according to the annual number of transactions. The initial enrollment period opens on July 17 and will run through July 31. Following this period, the SSA will select a limited number of enrollees across several different categories for participation in the program, which is set to begin June 2020. Even if an applicant company is not selected to participate in the initial program, it would be eligible to participate when the program expands. Otherwise, new applicants will have to wait until the next enrollment period, which could be as long as two years.
This new SSA program would be a positive step toward reducing synthetic identity fraud. However, there is a balancing act between the costs for combating fraud and the actual cost of fraud. It will be interesting to follow the enrollment figures and other metrics to determine how effective this measure turns out to be. How do you feel about these efforts by the SSA?
By Douglas A. King, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed