Heightened consumer fraud risks threaten dealerships

New types of fraud have emerged in the wake of generative artificial intelligence (gen-AI) and other innovations, creating challenges for dealerships looking to protect their businesses.

Driving the news: Experian’s new U.S. Identity and Fraud Report highlights shifts in how businesses are facing fraud challenges now that new technologies have emerged. Most importantly, the data highlights a mismatch between what companies are best prepared for and what activity they are most likely to face.

• Businesses are most likely to face identity theft, which has so far accounted for 28% of reported fraud in 2024, followed by wire transfer fraud (also known as APP fraud) and new account opening fraud.

• While companies are most confident in their ability to defend against first party fraud and transactional payment fraud, they expect cybercrime and gen-AI crime to become their biggest issues over the next two to three years.

Zooming in: Gen-AI has applications in many types of fraud, especially for synthetic identity theft, a type of fraud leveraging both real and falsified information, sometimes from multiple victims. This should be particularly concerning for auto lenders, who saw a 98% year-over-year increase in synthetic identity theft in 2023.

• In the banking sector alone, 51% of financial institutions reported losing millions to AI-related crime last year.

• Unfortunately, no business sector seems to be directing enough resources to this emerging threat.

• Companies ranked countering gen-AI crime as 12th on their list of top investment priorities for 2024 in Experian’s report, behind virtually all other types of fraud.

Looking ahead: With many experiencing economic instability in the aftermath of the COVID-19 pandemic and new technologies making it easier than ever to fake one’s identity, the auto industry is likely to face high levels of fraud in the coming years. Fortunately, there are steps dealers can take to ready their businesses for the incoming wave of AI-enabled crime.

• Fraud detection platforms capable of confirming customer identities can detect criminal activity and reduce its impact. New advancements have recently made this technology more efficient for auto retailers.

• Thorough verification procedures, which confirm identities using a variety of sources, not only prevent theft but also improve consumer trust. Experian notes that 48% of survey respondents said they were more trusting of a company when it displayed effective security.

Bottom line: Around 80,000 vehicles were stolen using fake identities in 2023, according to the Federal Trade Commission, representing billions of dollars lost in both front and back-end revenue for dealers. To prevent theft levels from rising in the advent of gen-AI, retailers should consider investing in technologies and procedures that can combat this new threat.

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