With the summer holiday season approaching, many consumers are planning road trips and vacations, which often include car rentals. Late spring is also prime time for a high volume of car sales, resulting in surging credit applications to help purchase these vehicles. In either scenario, preventing fraud plays into a smoother ride for all parties. Identity verification to prevent fraud helps ensure delays with car rentals do not hinder customers. It also helps protect lenders and dealerships from fraudulent purchases.
“Steering Clear From Fraud: Identity Verification for the Automotive Industry” is the second edition of the Identity Verification Series, a collaboration between PYMNTS Intelligence and Intellicheck. It explores fraud and verification issues in the automotive industry, detailing current and future technologies and legislation surrounding prevention.
Fraud concerns grow
Auto lenders are growing more concerned about fraud.
Encountering fraud is a reality for the nation’s auto lenders. One in 4 of these lenders cite it as more of a concern this year than last.1
It is little wonder that the prospect of fraud looms over lenders: Nearly $8 billion in originated auto loans contain fraud or misrepresentation annually.2 Also, external research found that auto lenders’ top priorities in the last year were countering the threats of income and employment fraud.3
Misrepresentation by potential buyers is the largest threat faced by auto lenders in the last year — and for good reason. Approximately 43% of fraud and risk for auto lenders occurs when potential buyers fabricate or inflate income or employment.4 Such misrepresentation tends to surface early on. Up to 70% of early payment default (EPD) loans contain evidence of misrepresentation on the original loan application.5
Key types of fraud
Synthetic identity fraud — in which fraudsters create a fake identity by combining real and fake identity information — is skyrocketing as auto lending becomes a prime target of illicit actors. In fact, incidences of these attempts increased by 98% last year, according to the 2024 Auto Lending Fraud Report.6
Further, auto lenders will need to become aware of new types of fraud growth this year. Credit washing, the practice of consumers attempting to hide negative information in a credit report by falsely claiming identity theft, is expected to increase by 30% this year. This new headache, also known as “soft fraud,” is driven by growth in illicit credit repair activity.
New tech takes on fraudsters
New technologies are needed to protect consumers’ vehicle purchases and rentals — and to verify the identities behind these transactions.
A world of remote transactions and automated systems is fodder for fraudsters targeting the automotive industry. However, third-party cybersecurity and verification tools can help counter these scams by verifying identities in major transactions, such as when consumers rent or buy a vehicle.
Auto lenders, on their part, will need to figure out just how much they are losing in fraud first. That could prove cumbersome to many when 26% of auto lenders admit they do not track their fraud losses.7 Without tracking these losses, auto lenders will find it challenging to quantify credit losses that may correspond to fraud.
New innovations
To assist auto lenders, some companies are introducing innovations to prevent automotive industry fraud, including the following:
- Experian’s Fraud Protect is a tool to help auto dealers detect and prevent fraud attempts against customers. The tool lets dealers send customers a secure, dealer-specific URL via text, email or QR code.8
- Cox Automotive’s Synthetic ID Fraud Alert detects synthetic ID issues and helps dealers guard against fraudulent transactions earlier in the finance and insurance process.9 The system alerts dealers when customers may be using a synthetic ID and provides a risk level assessment score when dealers pull credit.
- Intellicheck’s partnership with DealerShop provides U.S. auto dealers and collision center members access to fraud protection.
Auto lenders turn to AI
Early adopters among auto lenders are using artificial intelligence (AI) to counter fraud — and it’s working.
Auto lenders are joining other industry leaders in adopting AI and using it to squash fraud attempts. Among auto lenders, 21% are early adopters who have embraced AI automation, which they find effective in reducing these instances. Auto lenders who have used AI see its benefits. Lenders say they are increasingly satisfied with their use of AI: 60% report being somewhat or very satisfied with their AI systems, up from 44% in 2023.10
Many in the automotive industry are adapting AI for tasks: 42% of automotive employees have used GenAI.11 Among the new innovations available to auto lenders, some include AI, such as Cox Automotive’s verification system. This system uses AI capabilities to combat the expected increases in fraud.12 Further AI adoption in the industry suggests that, beyond daily tasks, it is increasingly becoming a tool for prevention.
New legislation could help
Beyond the proactive steps by auto lenders, new government regulations are combating fraud in the automotive industry.
Where auto lenders and dealers fight fraud in the industry, the U.S. government is following suit with new regulations. The Federal Trade Commission’s CARS Rule adds truth and transparency to buying or renting a car. The CARS Rule outlines that certain deceptive or unfair practices are illegal, such as bait-and-switch tactics, hidden charges and other conduct that harms consumers and honest dealers.13
The rule also includes four basic principles to protect consumers shopping for vehicles: prohibiting misrepresentation, providing clear disclosure of all costs and banning add-ons to prices. At its core, the regulation is meant to encourage honest dealer practices.
Conclusion
Auto lenders, dealers and consumers have their hands full dealing with increasingly sophisticated fraud targeting the automotive industry. However, the emergence of new technologies, from AI to identity verification systems, will help enforce strong boundaries against eager fraudsters while protecting the auto industry and the consumers seeking a vehicle for their next commute or road trip. The auto industry must take strides to initiate the use of new tools, for its benefit and that of the customers it serves.
For more, read the May 2024 report, “Real Estate and Fraud: Identity Verification for the Most Important Transaction of Your Life.”
1. [Author unknown. 2023 Auto Lending Fraud Trends Report. Point Predictive. 2023. Accessed June 2024.]↩
2. [Author unknown. 2024 Auto Lending Fraud Trends Report. Point Predictive. 2024. Accessed June 2024.]↩
3. [Author unknown. 2023 Auto Lending Fraud Trends Report. Point Predictive. 2023. Accessed June 2024.]↩
4. [Ibid.]↩
5. [Author unknown. 2024 Auto Lending Fraud Trends Report. Point Predictive. 2024. Accessed June 2024.]↩
6. [Ibid.]↩
7. [Ibid.]↩
8. [Experian Launches Fraud Prevention Tool for Car Dealers. PYMNTS. 2024. Accessed June 2024.]↩
9. [Cox Automotive Rolls Out Synthetic Identity Fraud Indicator for Car Dealers. PYMNTS. 2024. Accessed June 2024.]↩
10. [Author unknown. 2024 Auto Loan Defect Survey Report. Informed. 2024. Accessed June 2024.]↩
11. [Author unknown. Research: As Automotive Sector Embraces Connected Cars and Generative AI, Security Risks Loom Large. Salesforce. 2023. Accessed June 2024.]↩
12. [Author unknown. Cox Automotive & Canopy Collect collaborate for insurance verification. Auto Fin Journal. 2024. Accessed June 2024.]↩
13. [Author unknown. Combating Auto Retail Scams Trade Regulation Rule. Federal Trade Commission. 2024. Accessed June 2024.]↩
