Synthetic identity theft is a threat to the wellbeing of consumers—but it also poses a significant threat to financial institutions as well.
When you hear the term, “fake identities”, things like spies, espionage, and sophisticated criminals hiding from the law might come to mind. However, fake identities aren’t just used for clandestine activities—they’re also used to commit a shockingly common crime: synthetic identity theft. This particular fraud can be incredibly difficult for institutions to identify, and with rise of AI, it’s only becoming more difficult to detect—and easier than ever for criminals to pull off. For financial institutions looking to protect their consumers from fraud, defending against this fraud is more important than ever.
How synthetic identity theft works
While other forms of fraud, such as scams, might rely on speed, synthetic identity theft is the opposite. It takes time to execute, and although it requires a much longer timeline, the payday for criminals can be huge.
Synthetic identity theft starts with fraudsters getting their hands on a person’s personal information, such as a stolen Social Security Number (SSN). They take this real piece of personal data and combine it with fabricated or manipulated details such as a false name, date of birth, or address. While information like SSNs can be stolen through scams, data breaches, and other methods, it is often purchased on underground marketplaces located on the dark web. Criminals often use information belonging to individuals with no established credit history, such as children, seniors, or underserved populations.
Using this blended identity, criminals apply for credit products, such as loans and credit cards. Even when the initial application is denied, a credit file may still be created within the credit bureau system. That file becomes the foundation of a synthetic identity.
Using the credit profile, fraudsters can target people with a good credit history and add themselves as an authorized user in a process known as “piggybacking”. Then the long con begins. As the criminal begins establishing a credit history, they can begin applying for services like credit cards, loans, or other credit services. They’ll make payments on the credit accounts, posing as the perfect customer to be granted higher loan amounts by their targeted financial institution.
These fraudsters will spend months or even years building these credit accounts. Then one day, they execute the scheme by maxing out the credit they’ve been granted and disappearing, leaving the financial institution, and the person they used to create the account, holding the bag.
The threat of synthetic identity theft
Although synthetic identity theft takes time and effort to execute, it presents a serious issue for consumers and financial institutions alike. When a fraudster uses a person’s SSN to open a fraudulent account and racks up a large debt, that person could see significant damage to their credit score, making it difficult for them to qualify for other credit services. That cannot only have a significant impact on the consumer but also reduce their ability to purchase credit services from their financial provider, directly impacting their financial institution’s bottom line.
And with U.S. lenders facing $3.3 billion in exposure from synthetic identity theft in the first half of 2025, it’s clear that financial institutions need to work towards preventing it—and that starts with protecting their customers.
How financial institutions can protect their consumers against synthetic identity theft
Unfortunately, there isn’t any guaranteed way for financial institutions to completely protect themselves and their customers from synthetic identity theft. However, an identity protection solution offers several features that can enable financial institutions to reduce the risk of synthetic identity theft and protect their consumers from a significant threat.
Dark web monitoring: This gives consumers the ability to monitor the dark web for personal information that is often used in synthetic identity theft, such as SSNs
Credit monitoring: With credit monitoring, consumers can detect signs of synthetic identity theft, such as new credit accounts associated with their file, and prevent further damage from happening
Identity theft restoration: Identity theft restoration can help consumers who have experienced identity theft repair the damage and help prevent further incidents from occurring
To learn more about how an identity protection solution can help financial institutions protect their customers and differentiate their services, visit our Business Hub.
