Application Fraud in the Consumer Credit Market

Today, credit is being more readily offered, notably to higher risk segments of the population, as credit granting institutions seek out new areas in which to expand. In the emerging markets particularly, companies may not be particularly well versed in good credit risk and fraud assessment practices. As a result, credit grantors face an increased risk of application fraud. Application fraud can be defined as the submission of a fraudulent credit application in order to obtain credit goods or services through deception. This can include indicating that time at current address is longer than it really is, or that one’s salary is more than it actually is. Another type of application fraud is called identity fraud, where an individual purposefully uses someone else’s personal details, such as name and employer, without their consent, for the purposes of obtaining credit.

Many organizations do not maintain accurate records regarding fraud, and the actual costs and volumes associated with application fraud are ‘lost’ in bad debt. Typically it is the Collections department that are faced with the fraudulent accounts, trying to trace individuals who have become delinquent. Typically fraudulent accounts roll through the Collections process, never making a payment, and being written-off as soon as the company’s write-off policy allows.

There are two basic categories of applications fraud:

• Opportunistic fraud – typically an individual is "trying their luck". This type of fraud tends to be clumsy and easily detected.
• Organized fraud – this is more insidious than opportunistic fraud, and typically involves a group of individuals. A fraud syndicate will target specific credit grantors and will continue in their efforts to obtain goods until such time as measures are put in place to identify and stop their behavior.