EMV will also cause a spike in application fraud

Fraudsters never rest. As one avenue closes, criminals seek out new ways to perpetuate criminal activity. Along with the EMV migration, companies can expect fraud to come from new places, particularly the card-not-present space. However, there is a less frequently mentioned source of fraud that experts also anticipate will increase over the coming months: application fraud. Financial institutions need to be wary of this trend and invest in better fraud management tools to combat it.

What is application fraud?

Application fraud is generally an extension of identity theft. When someone applies for a credit card using another person’s credentials, they are committing application fraud. This type of fraud isn’t necessarily limited to bank cards. Any time a criminal attempts to avoid payment by submitting someone else’s personal data, they are participating in application fraud, whether it’s a telephone or cable company.

However, it’s more likely that fraudsters will commit synthetic identity theft, also known as ID manipulation, which according to the Federal Trade Commission, accounts for up to 85 percent of all identity fraud. In this case, criminals combine legitimate and fake information to create a new identity, but this new identity is linked to an existing social security number.

Precedents from across the Atlantic

Organizations can expect to see a spike in application fraud because it’s happened before. The U.S. has been slow to transition to EMV payments compared to other countries, such as the U.K. and Australia. As a result, companies have been able to examine the effects of the transition as a way to set expectations for the U.S. rollout. According to a report from Aite, issuers in Australia saw application fraud increase threefold after transitioning to chip-and-pin cards. The migration began to roll out in 2008, and application fraud increased dramatically in 2012. In the U.K., certain issuers experienced 800 percent year-over-year increases in losses due to fraudulent applications after the EMV migration.

Why it matters

Financial institutions take on major losses as a result of application fraud. Criminals operating illegitimate accounts run up huge credit card bills or loans they have no intention of paying back. According to data from Meridian Research, the cost of application fraud in the U.S. reaches more than $35 billion each year. In addition, these organizations need to work to protect customers against security breaches that will make their personal information available to fraudsters. Data breaches inevitably erode trust in the companies that fall victim to them, causing long-term harm to an organization’s reputation.

How fraud management tools can help

The best approach to dealing with application fraud is to develop strategies and seek out tools to help prevent it. Use a system to validate new applicants and get quick access to risk scores so you have high visibility into potentially fraudulent applicants.

Financial institutions should consider fraud management platforms that are powered by machine-learning algorithms to make it easier to identity and weed out fraudulent applications without disrupting the experience of legitimate customers. While security is an important protection measure for legitimate users, consumers can become frustrated if their account is frozen as a result of a legitimate purchase. Over time, algorithms learn customer behaviors so they can effectively isolate activity that is likely to be fraudulent.

It’s also helpful to educate consumers on security measures they can use to make sure their information remains safe. With a combination of these tactics, financial institutions can protect themselves and customers from costly breaches and application fraud that can result.


For the latest trends in ecommerce fraud prevention, download the Paypers 2016 Web Fraud Prevention, Online Authentication & Digital Identity Market Guide.

Ken Bui
Ken Bui

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