Using more digital tools is making dealerships more vulnerable to fraud and identity theft.
The automotive industry is increasingly finding itself under siege by a growing trend of fraud, particularly through the use of fake IDs to purchase vehicles.
This issue has far-reaching implications for dealerships, particularly in F&I departments, where the pressure to prevent such fraud is mounting. The rise in identity fraud has been fueled by several factors, including the digitization of the car-buying process, economic challenges, and the growing sophistication of fraudsters.
This confluence of factors has made it easier for criminals to exploit vulnerabilities in the system, resulting in significant financial losses and operational challenges for dealerships.
A survey by eLEND Solutions revealed that a staggering 84 per cent of dealerships were seeing a marked increase in identity fraud since the onset of the COVID-19 pandemic.
The shift towards online and remote transactions, which accelerated during the pandemic, has inadvertently opened up new avenues for fraud. Fraudsters have capitalized on the increased use of digital platforms to perpetrate identity fraud, leading to a substantial rise in fraudulent activities across the industry.
F&I offices now face the added burden of combating this escalating fraud.
In the past, basic identity verification methods, such as checking a driver’s license, were considered sufficient. These methods, however, are no longer adequate in the face of increasingly sophisticated fraud tactics.
Still, many dealerships are slow to adopt more advanced identity verification technologies, leaving them vulnerable to fraud. In fact, the eLEND Solutions survey found that 67 per cent of dealerships do not currently use document authentication technologies that could help verify the legitimacy of IDs presented during transactions. This gap in the verification process is a critical vulnerability that fraudsters are quick to exploit.
The timing of credit pulls has also become a crucial factor in fraud prevention. Historically, dealerships often waited until the F&I stage to pull credit reports, but this practice has evolved in response to the rising fraud threat.
In 2022, 40 per cent of dealerships reported pulling credit reports before the test drive, a significant increase from just 8 per cent in 2018. This earlier credit check allows dealerships to identify potential fraud before a transaction progresses too far, but its effectiveness depends on the integration of robust ID authentication technologies. Without these technologies, even early credit pulls are likely not sufficient to prevent fraud.
The rise in fraud is not limited to just identity theft but also extends to loan application fraud, which has seen a significant increase as well. Nearly 80 per cent of dealerships reported experiencing loan application fraud in the past year, with some dealerships noting that one in every 100 applications was fraudulent.
This type of fraud not only affects the dealership’s financial health but also complicates the work of F&I managers, who must now scrutinize each application more carefully to ensure its legitimacy. The rise in loan application fraud, combined with identity theft, creates a challenging environment for F&I departments, which must balance the need for thorough verification with the desire to maintain a positive customer experience.
To effectively combat this growing threat, dealerships must adopt a multi-layered approach to fraud prevention. This includes the implementation of forensic authentication tools that not only verify the validity of a driver’s license but also cross-check the extracted data against multiple databases to ensure consistency and accuracy.
Additionally, implementing multi-factor authentication that incorporates proof of presence, such as sending a one-time passcode to the verified phone number of the customer, can further reduce the likelihood of fraud. Such measures, while potentially adding some friction to the sales process, are essential in protecting dealerships from the significant financial and reputational damage that can result from fraudulent transactions.
As the automotive industry continues to digitize, the role of the F&I office will become increasingly pivotal in safeguarding against these evolving threats.
Dealerships that fail to adapt to the new reality of heightened fraud risk may find themselves increasingly vulnerable, both financially and operationally. By embracing advanced identity verification technologies and re-evaluating traditional processes, dealerships can better protect themselves and their customers from the growing menace of automotive fraud.
Citations
- eLEND Solutions. (2022). 2022 Identity Fraud Survey Report. Retrieved from eLEND Solutions.
- Ottawa City News. (2024, April 26). Car scams are on the rise, warns online auto retailer. Retrieved from Ottawa City News.
- Morningstar Canada. Fraud hitting Canadian auto and mortgage sector. Retrieved from Morningstar Canada.
- CTV News. (2024). Fraud in auto, credit card, mortgage sectors rise amid interest rate hikes: Equifax. Retrieved from CTV News.
- Global News. (2023, January). Arrests made after fake ID used to buy car from Lindsay dealership. Retrieved from Global News.
- Bankrate. Auto loan fraud is on the rise. Retrieved from Bankrate.
- Experian. How Identity Fraud is Draining Auto Dealerships. Retrieved from Experian.
