The car-buying experience has come a long way from the days when a paper credit application and a photocopy of your driver's license was all that stood between you and your new vehicle. But has it really?

Back then, dealerships relied on a simple manual identity verification and a quick chat with the sales team, which was pretty much what it took to seal the deal.

In 2023, the auto industry experienced a surge by 28% of fraudulent applications, as reported by Equifax Canada. Today, identity fraud continues to be a growing threat facing the automotive industry, and many Canadian dealerships are lagging in adopting effective modern identity verification processes, essential for protecting their businesses, their lender relationships, employees, and customers.

The Current State of Identity Verification in Auto Dealerships

Despite the technological strides in other industries, many Canadian auto dealerships still cling to outdated methods for identity verification. Traditionally, a simple photocopy of a driver's license was considered sufficient to prove one's identity and eligibility to drive. As our reliance on digital technology grows, and counterfeiting technology becomes increasingly sophisticated, relying on such antiquated methods leaves dealerships and their stakeholders increasingly vulnerable to fraud. Criminals can easily produce convincing fake documents, making it imperative for dealers to reassess their verification processes.

The Hidden Threat

While vehicle theft and border security issues make frequent headlines, the use of fake identities to drive vehicles off dealership lots is less discussed. Media coverage often focuses on [stolen vehicles and cargo containers filled with illicitly obtained vehicles,](https://toronto.ctvnews.ca/majority-of-600-cars-seized-from-montreal-port-stolen-from-gta-police-say-1.6846441) but the initial use of counterfeit IDs to secure these vehicles is rarely addressed. Why? Only 5-10% of identity crime victims report to the authorities, according to [Canadian Anti-Fraud Centre](https://www.msn.com/en-ca/money/topstories/most-victims-dont-report-fraud-as-scammers-hit-canadians-for-billions-annually-anti-fraud-agency/ar-BB1pY9uZ). Victims of identity crimes often choose not to report the incidents for several reasons. Many feel embarrassed and fear judgment from friends and family, worrying about the stigma associated with being defrauded. Others believe that there is little chance of recovering their losses and that no recourse will be available to them. The prospect of having to testify in court can be intimidating, leading some to hope that the problem will simply go away if they ignore it.

This oversight is problematic, as it allows fraudsters to exploit the weak points in a dealership's identity verification processes. By using fake identities, criminals can easily circumvent the very systems designed to prevent fraud. This breach sets off a chain reaction, resulting in multiple adverse outcomes, such as the approval of fraudulent automotive loans and the unauthorized sale of stolen vehicles.

Reputation Risk for Auto Dealerships

The risks of identity fraud extend beyond financial loss and operational disruption. Dealerships who fall victim to ID fraud scams face significant reputational damage. In an industry where trust and reliability are paramount, a single instance of fraud can erode consumer confidence and attract negative media attention. The long-term impact on a dealership's reputation can be severe, potentially resulting in decreased customer loyalty and diminished sales.

The Risk of Losing Lenders

One of the more serious consequences of poor ID verification processes is the potential for strained relationships with lenders. Lenders depend on dealerships to conduct thorough identity checks as part of the loan application process. If a dealership fails to meet these standards, lenders may hesitate to work with them or, worse, sever their ties altogether. Lenders are also starting to do charge-backs with full recourse to dealerships originating bad/fraudulent loans. This not only limits the dealership's ability to offer financing options but also jeopardizes its overall business stability. The financial implications of losing lender relationships can be profound, affecting the dealership's sales and profitability.

Exploring the Benefits of Upgrading Identity Verification for Dealerships

To stay competitive and secure, Canadian auto dealerships need to address gaps between their current processes and the increased risks of fraud to modernize their identity verification processes. Consumers now expect the same level of scrutiny and security that is standard in financial institutions. This means incorporating advanced technologies like biometric checks, digital ID verification, and real-time document authentication. Such measures not only help prevent fraud but also enhance the customer experience by providing a more trusted, secure and friction-right process.

The Way Forward

Dealerships should adopt best practices for identity verification to mitigate the risk of fraud. This includes integrating modern technology that matches even the basic security standards found in financial institutions. Investing in better verification systems will not only protect against fraudulent activities but also bolster the dealership's reputation and maintain strong relationships with lenders. As technology continues to evolve, staying ahead of fraudsters requires vigilance and adaptation.

Conclusion

The Canadian automotive sector is facing the growing threat of identity fraud. Canadian auto dealerships have a valuable opportunity to enhance their verification processes, which can help mitigate fraud, strengthen their reputations and consumer trust, and maintain important lender relationships. By embracing advanced identity verification technologies and best practices, dealerships can ensure a more secure and reliable car-buying experience for their customers.

Paays’ Anne-Marie Kelly on protecting against fraudulent buyers