The Hidden Gaps in Fraud Prevention

Why traditional defenses are falling short

Fraud is no longer just a battle of wits between financial institutions and bad actors—it’s a full-scale arms race. While lenders invest in fraud prevention tools, fraudsters evolve, developing sophisticated methods that slip through detection systems. And nowhere is this more evident than in the rise of synthetic identity fraud, a crime now responsible for nearly 10% of credit losses in unsecured lending.

During a recent GDS Link webinar, industry experts explored the blind spots in fraud prevention, the strategies fraudsters use to outmaneuver defenses, and the evolving role of AI in fraud detection.

“Many lenders assume they’re covered because they use multiple data vendors, but fraudsters have adapted. They know how to manipulate these tools,” said Vivek Ahuja, head of new markets and alliances at SentiLink.

The Rise of Synthetic Identities—and Why Lenders Are Still Playing Catch-Up

Synthetic identity fraud has rapidly become one of the fastest-growing financial crimes in the United States. Unlike traditional identity theft, which exploits stolen personal information, synthetic fraud involves creating entirely new identities by combining real and fabricated data.

These synthetic personas build credit profiles over time, often going undetected until lenders face massive charge-offs. Ahuja pointed to a particularly troubling trend: fraudsters exploiting dormant business entities.

“We’ve seen sophisticated fraud rings taking over aged but inactive businesses—entities that would pass most underwriting checks—and inserting synthetic identities as the business owners,” he explained.

This tactic allows fraudsters to bypass traditional credit screening, particularly in small-business lending. Credit washing—where fraudulent disputes remove legitimate negative marks from a credit report—has also become a growing concern, making it even harder to distinguish between real and fraudulent borrowers.

The Problem with One-Size-Fits-All Fraud Strategies

Despite the rise of advanced fraud detection technologies, many lenders still struggle to integrate these tools effectively. Often, fraud prevention measures don’t align with an institution’s lending strategy, leaving critical gaps in detection.

“Where we see teams struggle is when their fraud strategy isn’t well-suited to their acquisition or growth strategy,” said Adam Taylor, head of customer success at GDS Link. “An indirect auto lending strategy, for example, needs a very different fraud approach than a digital account opening process that offers referral bonuses.”

Many institutions rely on outdated fraud models inherited from previous teams, focusing on new data providers rather than holistically re-evaluating their strategy. This approach creates inefficiencies, adds unnecessary friction, and, in some cases, still leaves institutions vulnerable.

“Fraudsters don’t rely on brute force,” Taylor noted. “They find and exploit workflow gaps that institutions don’t even realize exist.”

One example is the manipulation of contact information during onboarding. A fraudster might initially provide a valid phone number and email address that pass verification, only to swap them out post-approval—enabling them to hijack accounts and reroute communications before detection.

AI and the Future of Fraud Prevention

Artificial intelligence is increasingly being integrated into fraud detection models, but experts caution that AI alone isn’t a silver bullet. While machine learning can analyze massive datasets to detect anomalies, it still requires oversight to ensure fairness and accuracy.

“AI is only going to get bigger, but how reliable it is depends on how you use it,” Taylor said. “If it’s making automated credit decisions, you need to be able to explain its reasoning. It’s not enough to trust that the model is correct—you need transparency.”

Ahuja agreed, emphasizing that AI’s real power lies in its ability to scale fraud detection efforts.

“The same fraud schemes exist—synthetic fraud, identity theft, account takeovers—but AI has amplified the speed and scale of attacks,” he said. “That’s what institutions need to prepare for.”

Rethinking Fraud Prevention: The Need for an Adaptive Strategy

Fraud prevention isn’t just about stopping bad actors—it’s about maintaining a seamless experience for legitimate customers. Institutions that apply rigid fraud controls risk losing valuable borrowers, while those that are too lenient leave themselves open to losses. The key, experts argue, is an adaptive, multi-layered approach.

“You need to think about the entire customer journey—how fraud fits into acquisition, credit decisioning, and post-onboarding,” Taylor said. “And more importantly, you need to test new strategies. Too many institutions can’t experiment without a full production deployment, which limits their ability to evolve.”

One promising development is the industry’s shift toward authentication-based security.

“Fraud and security are becoming more intertwined,” Ahuja noted. “We’re seeing institutions move away from passwords in favor of biometric authentication and passkeys, which eliminate common attack vectors like credential stuffing and phishing.”

As fraudsters continue to evolve, the industry must remain vigilant. Lenders that fail to adapt risk not just financial losses but long-term reputational damage. The challenge now is to develop strategies that don’t just react to fraud—but anticipate it.

Watch the Full Webinar

To hear the full discussion and learn more about how GDS Link and SentiLink are helping lenders stay ahead of fraud, watch the webinar replay: