Synthetic Identity Theft in 2025: How It Works and Costs Banks Billions

Julia Kagan is a financial and consumer journalist with extensive expertise in personal finance and fraud prevention.

Understanding Synthetic Identity Theft in 2024

Synthetic identity theft is a complex form of fraud where criminals blend stolen real information with fabricated details to forge entirely new identities. These fake identities are then used to open accounts, make purchases, and commit financial crimes.

This type of fraud enables perpetrators to deceive creditors, including credit card companies, by leveraging counterfeit profiles to access credit and steal funds.

Key Insights

• Synthetic identity theft merges authentic and false data to create deceptive new identities.
• Fraudsters often build credit history by responsibly managing accounts before exploiting them.
• Some criminals accumulate debt, then impersonate victims to restore credit lines and continue fraud.
• This crime is the fastest-growing financial fraud in the U.S., causing billions in losses.

How Synthetic Identity Theft Operates

Fraudsters steal Social Security numbers and combine them with fictitious names, addresses, and birthdates to craft synthetic identities. Since no single real victim is directly targeted, detection is challenging.

Multiple synthetic identities can be active simultaneously, with accounts maintained for months or years to build creditworthiness before executing large-scale fraud. In some cases, criminals pose as victims to recover credit and expand their fraudulent activities.

Not all synthetic identity fraud aims to steal money; some undocumented immigrants use these identities to access banking services, enabling them to receive payments and make transactions.

Challenges in Detecting Synthetic Identity Theft

Detecting synthetic identity theft is notoriously difficult. Financial institutions’ screening systems may mistake synthetic identities for legitimate customers with limited credit histories.

Criminals often establish a pattern of responsible account use before defaulting, a tactic known as bust-out fraud, which complicates fraud detection and prevention.

Synthetic vs. Traditional Identity Theft

Unlike traditional identity theft, which involves stealing an existing person’s identity, synthetic identity theft creates new identities using a mix of real and fake data, making it harder to track.

Traditional identity theft victims usually discover fraud when unauthorized accounts appear on their credit reports or through bank notifications, enabling them to take corrective action.

Victims of identity theft can freeze credit files and initiate investigations, often avoiding liability for fraudulent accounts.

The Financial Impact of Synthetic Identity Theft

This form of fraud is among the most prevalent and costly, with the Federal Reserve reporting $6 billion in lender losses in 2016 alone and average charge-offs around $15,000.

Who Is Responsible and Who Suffers?

Banks and credit institutions often bear the brunt of synthetic identity theft losses, as criminals use real stolen Social Security numbers paired with fake names to open accounts and default on payments.

The rise in synthetic identity theft also disproportionately affects children, whose Social Security numbers are 51 times more likely to be exploited, impacting their financial futures significantly.

A 2017 Federal Reserve report identified over one million children as victims of synthetic identity fraud, highlighting the urgent need for enhanced protections.

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