in-depth Guide

Application fraud: Everything you need to know

With more businesses accepting applications online, they’ve become increasingly vulnerable to application fraud. Here’s what they need to know.

While the Internet can make reaching and bringing in new customers easier than ever, it has downsides, as well: Without the face-to-face element of being in person, businesses are vulnerable to application fraud. They can't see the actual human being behind the screen, making it easy for fraudsters to commit identity theft. 

This is a challenge rental agents, realtors, creditors, and loan officers face daily. And if they're not careful, it can cost their organization thousands. 

Fortunately, there are ways to detect and prevent application fraud, which we'll discuss in this article. But first, let's start with the basics. 

A person fills out a physical application, which is no longer the norm (making digital the channel of choice for application fraud).

What is application fraud?

Application fraud is when an applicant submits false information to a creditor, property manager, or other entity that relies on personal data to approved customers. It's identity theft at its finest and it's rampant across the world. 

According to the Federal Trade Commission (FTC), there were 2.2 million fraud reports and 1.4 million identity theft reports in 2020. 

A graph from the Federal Trade Commission shows the rise in identity theft, which includes application fraud.

Thanks to technology, stealing personal information has never been easier. Let's review how fraudsters can commit (and get away with) application fraud. 

How is application fraud committed?

Consumers demand instant access to financial services. So banks and credit unions design digital products and services to meet their needs. Great for business. Not so great for security.

Processing online applications puts many types of businesses (including auto dealers, property managers, loan officers, and credit card companies) at risk of being defrauded. 

When a person applies for a credit line or loan, they expect a speedy application process. To accommodate this, companies offer fast approval times. Unfortunately, this doesn't just appeal to today's consumers. It also attracts and empowers fraudsters to commit third-party fraud.

When committing third-party fraud, criminals will fill out applications under someone else's identity without the organization (or that individual) knowing. If they know enough about the victim, the system can't tell the applicant isn't who they say they are. Then the scammer is free to max out the credit line and disappear (aka bust-out fraud). 

By the time the company figures out application fraud occurred, it's too late and the fraudster is long gone. And thanks to technology, criminals can submit fraudulent applications at scale. This is possible using advanced tools like bots, cloud infrastructure, and virtual machines to submit hundreds of thousands of applications at one time to different financial institutions. 

They use an array of tools and techniques to make the application appear legitimate, making fraud detection difficult. 

This is likely why loan application fraud risk is on the rise. 

Methods criminals use for fraud

A person uses a credit card to potentially fill out a fraudulant application on their phone

There are several ways scammers commit application schemes. One is using synthetic identities, which is a mix of true and false information on an application. For example, the Social Security number is valid, but the other personal details are fabricated. 

Another example is first-party fraud: when a person uses their true identity on an application, but presents false information. The applicant supplies fake pay stubs or income and identity documents to get approved for a loan they otherwise wouldn't have. 

It's challenging to identify any type of fraud when businesses allow online submission of applications and identity documents. But how do scammers get their hands on personal information and commit application fraud?

Breaching databases

Data breaches happen to businesses large and small, leaving organizations open to heightened fraud risk. Some happen intentionally, while others are by accident. For instance, an employee can create an insecure password (something easy to guess). Or leave the passcode (or unlocked device) somewhere someone can swipe it and gain access. 

It's also common for data breaches to happen when hackers blatantly target an entity to gain access to their database. They use various technologies to make this work. For instance, bots inserting millions of variations of passwords to crack a code. 

Once a data breach happens, millions of data records are up for grabs. This includes names, birth dates, addresses, phone numbers, and account details. Enough information to commit a mix of real and synthetic identity fraud.

Targeting call centers

The internet isn't the only way criminals are stealing identities—they're also using call centers. Unfortunately, voice isn't enough to determine someone's identity, making it another easy target for fraudsters. 

Since there's no way to detect synthetic identities or fraud patterns, criminals get away with it. In fact, one report shows contact center fraud increased by 40% in 2020

Intercepted mail

Mail interception is more sophisticated than swiping envelopes from mailboxes and hoping for the best. Criminals today use USPS Informed Delivery to apply for credit cards. This is a service USPS offers to allow users to track mail and packages prior to their delivery. 

This notifies the scammer of the credit card's arrival so they can snatch it before it's seen. Using this tactic, bad actors can apply for credit cards using stolen identities and correct addresses, without the victim knowing. 

Using cloud infrastructure

Criminals are also venturing into virtual spaces to commit identity theft and application fraud. This includes the same cloud services businesses use daily. Fraudsters, however, use the cloud to run automated scripts and bots to perform immense fraud attacks. For example, using bots to quickly generate emails from Outlook and Gmail. 

Bots can also be used for brute force attacks by hacking into accounts by entering variations of PINs and passwords at scale. It's also not unheard of for criminals to use bots for credential stuffing. This is when fraudsters use a collection of personal information (names, emails, etc.) from a data breach to gain access to a system. 

Then there are more sophisticated hacks called IP obfuscation: the use of VPNs and proxies to bypass IP blacklists and rules-based fraud prevention systems. This allows criminals to hide where they are (aka location spoofing) while performing application fraud. 

How to detect and prevent application fraud

A fraudster types information from their phone onto a laptop in an attempt to commit application fraud.

Businesses are taking steps to detect and prevent application fraud. How can you do the same? Here are a few techniques used to get ahead of application fraud. 

Security measures for in-house personnel

Employees are your first line of defense against fraudulent attempts, so it's ideal to educate them about application fraud. But don't stop there; implement procedures to follow. That's what GDI Insurance Agency did after dealing with fraudulent applications. 

Today, they use the following to prevent fraud:

  • Educating the team on
  • Common areas of fraud
  • Scenarios where fraud comes up most
  • Anti-Money laundering training for our team
  • Requiring third-party verification of data.
  • Confirm corporate info on a Secretary of State website
  • Verify underwriting data with third-party vendors

Many insurance agencies they work with also use data validation techniques during the underwriting process to detect incorrect and fraudulent information. For example, using AI tools for:

  • Electronic motor vehicle records
  • Automobile registration verification
  • Address verification

Speaking of which, artificial intelligence is on the rise in the fraud prevention realm, as well. 

Machine learning solutions

Artificial intelligence and machine learning are taking the fraud industry by storm. They’re making it possible for companies to detect and prevent various types of fraud. Financial institutions will, for example, use rules engines and a mix of supervised and unsupervised machine learning. 

But as with most technologies, they can become outdated, so you need solutions that evolve. Otherwise, your rules engines and rules-based systems become susceptible to false positives. This leaves the door open for criminals to slip through unnoticed, especially when they're using tools designed to evade them. 

Supervised learning uses a tagging system to identify unknown fraud (with the help of humans). It's an ongoing process to keep the system updated. The downside: If you don't do this regularly, your system becomes prone to errors.

Unsupervised learning systems evolve on their own, making them a more promising option for fraud detection. However, it requires advanced domain knowledge to get it set up.Plus, some unsupervised machine learning algorithms aren't scalable to production-level datasets, which is critical for fraud prevention. 

But this doesn't rule out artificial intelligence, especially if it's designed specifically for fraud detection. 

AI fraud detection

AI tools are available just for fraud detection. Inscribe's solution helps bankers, lenders, and other financial services company automatically process applications and detect more fraud.

Inscribe uses rules-based fraud detection capabilities and machine learning to generate a full analysis of the legitimacy of an application document.

Inscribe’s automated fraud analysis enables your team to make quicker and more precise decisions. Our solution scans for added text boxes, mismatched fonts, and incorrect personal details (e.g., name and address), and so much more within seconds. If needed, it can even flag areas for manual review. 

This offers more efficient and ultimately automated document fraud reviews leading to fewer loan write-offs. Inscribe filters out the bad so your team can focus on the good. 

Using artificial intelligence for fraud detection is excellent for organizations that process dozens or even thousands of applications per day. It's a scalable solution (without scaling costs)—perfect for small businesses and enterprises alike.

Don't let application fraud hurt your business 

Digital transformation is the buzzword of the century. It's helping organizations modernize their processes, but it's also making them vulnerable to fraud. As long as businesses use interconnected devices and cloud solutions, this will remain true. 

The answer is finding technologies to protect your financial and reputational wellbeing. With Inscribe, you can reduce application fraud, saving you hundreds of thousands in unnecessary losses. 

Curious about how Inscribe can detect application fraud in your business? Talk to one of our experts today.

Want to learn more?

Check out our other guides on fraud detection:

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