Q&A: Addressing the rising fraud threat in the automotive industry

Cars and general street scene. — Image © Tim Sandle

Fraud is a problem across every industry. One area where cases of fraud have been increasing is in relation to the automotive sector, especially when it comes to sales. Fraud can be something that is internal or external.

What can be done to address this problem? Digital Journal spoke with Kanchana Sundaram, Experian’s senior director of product and innovation, automotive, to understand the current issues and to explore solutions. The interview focuses on the automotive sector in the U.S.

Digital Journal: How significant has fraud become for automotive dealers?

Kanchana Sundaram: Fraud has been a growing issue across all industries. In fact, according to an Experian report, nearly 70% of businesses reported that fraud losses have increased in recent years. And the overarching trend mirrors some of what we’re seeing in the automotive industry.

With higher vehicle prices and digital retailing becoming more of a fixture within the industry, dealers and lenders are prime targets for opportunistic fraudsters.

We’ve learned of instances of criminal fraud rings buying consumers’ identities to implement large scale schemes to steal hundreds of thousands of dollars in inventory. In some instances, the dealer isn’t even aware they’ve become a victim of fraud until the fraudster misses their first payment and vehicle is shipped out of the country—and at that point, the vehicle is nearly impossible to recover.

While vehicles are expensive, the financial impact extends far beyond the price of the vehicle. Dealers can accrue legal fees, rising insurance premiums and chargeback fees, not to mention the indirect costs, such as business disruption and reputational damage.

DJ: What are some of the most common types of fraud automotive dealers are currently facing?

Sundaram: According to the Federal Reserve, synthetic identity fraud is the fastest growing financial crime in America. In fact, it’s among the most common fraud schemes that automotive dealers are challenged with—the others being third-party fraud and first-party fraud. Importantly, each is very different:

• Third-party fraud occurs when fraudsters steal an individual’s identity to purchase a vehicle
• First-party fraud is a byproduct of a person knowingly misrepresenting their identity or providing false information, often with the intention of not paying for the vehicle
• Synthetic identity fraud is when fraudsters create fake identities and build credit profiles over time before using them to finance a vehicle they do not intend to pay for

It’s easy for auto dealers to view each type of fraud under the same microscope and implement a one-size-fits-all approach, but the truth is, not all fraud is perpetrated equally. Some of the patterns and behaviors that fraudsters exhibit with third-party fraud differ completely from those of using synthetic identities. Distinguishing between the most common fraud schemes better positions dealers to take the most appropriate action and protect their portfolios and bottom line.

DJ: With artificial intelligence (AI) gaining more traction, how is the automotive industry positively and negatively impacted?

Sundaram: Much like other industries, AI has revolutionized the auto landscape, optimizing the manufacturing process, improving safety features and vehicle functionality, as well as enhancing the overall driver experience. And we probably haven’t even scratched the surface of how AI will transform the auto industry for the better; we’re still in early stages.

While AI has set the industry on a path forward, we’d be remiss if we didn’t acknowledge the bad actors leveraging AI to take advantage of unsuspecting dealers and consumers to perpetrate fraud. Today’s fraudster is more sophisticated and uses advanced tools and analytics, such as artificial intelligence, to implement complex fraud schemes that can be difficult for some dealers and consumers to identify until it’s too late.

For instance, some bad actors use artificial intelligence and machine learning to develop sophisticated algorithms or deepfakes to circumvent more traditional fraud detection and identity verification systems. 

DJ: Why do you think it’s important for dealers to have the most up-to-date technology to combat fraud?

Sundaram: Fraud is evolving. What worked 20 years ago, doesn’t always work today. As I mentioned, bad actors have become more sophisticated and are leveraging the most advanced technology to perpetrate fraud. To stay ahead of an increasingly advanced bad actor, dealers need to move beyond standard risk mitigation strategies. And they need to do this without disrupting the vehicle buying experience for consumers. That means combatting technology with technology.

For example, utilizing the most current artificial intelligence and machine learning capabilities can help identify unusual activity or fraudulent patterns that may otherwise go undetected.

Proper identity verification relies on a multilayered approach that is rooted in intelligence and passive recognition and authentication, and an improved customer experience. While a silver bullet for fraud prevention does not exist, leveraging advanced data and analytics empowers dealers to stay ahead of bad actors and make more informed fraud decisions.