The power of today’s digital economy is its ability to grow and evolve. But with great power comes great responsibility, and in this case, that responsibility is to protect sensitive information from abuse and fraud. The digital economy’s dynamic nature has created many obstacles for security professionals, and the unprecedented chaos of the global pandemic has only increased and accelerated these struggles.
One of the most significant issues financial institutions (FIs) are seeing right now is application fraud. According to Aite Group’s Application Fraud: Trend Analysis and Mitigation Challenges white paper created in partnership with Early Warning Services, LLC, “application fraud has consistently been reported to be among the top two or three biggest pain points for fraud executives at FIs across the globe for the last five years, and there is evidence that it is has gotten significantly worse in 2020.”
This white paper takes a look at trends in application fraud in demand deposit accounts (DDA) and credit card accounts, the market and environmental forces that impact application fraud, and how FIs are mitigating the associated security challenges.
Here are some key takeaways from Aite Group’s Application Fraud: Trend Analysis and Mitigation Challenges white paper.
Now Trending in Crime: Application Fraud
According to Aite Group’s 2019 survey of 27 fraud executives, 33% of respondents said application fraud was a point of difficulty for them. In 2020, the trend continues with first-party check fraud stemming from application fraud making up three of the top four forms of attack patterns that fraud executives find most concerning.
Growth in application fraud has seen an average increase of 16% year-over-year from 2015 to 2019. In 2020, COVID-19 accelerated that growth, becoming the most extensive environmental factor impacting all fraud variations, with evidence that DDA and credit card losses are increasing. The coronavirus has undoubtedly had a huge impact on application fraud. However, there were market forces increasing application fraud attack rates and losses well before COVID-19 came on the scene.
These market forces driving application fraud are the result of a continued increase in data breaches that expose credentials and personally identifiable information, enabling fraudsters to assume all or part of a victim’s identity. Fraudsters can then advance their capacity to automate their attacks by using bots and human farms that are designed to overcome aging fraud detection capabilities, especially among FIs that fail to keep their detection capabilities current.
Prior to the pandemic, mule activity and deposit fraud were the most common types of fraudulent activity associated with DDA application fraud. While deposit fraud continues to be the most common, unemployment fraud is gaining momentum because of the interception of funds from government stimulus programs, including beefed-up unemployment benefits and the Paycheck Protection Program (PPP).
“The market forces that have been driving increases in application fraud for years remain very influential, and the environmental conditions brought about by the pandemic have only accelerated those trends,” said senior analyst Trace Fooshee from Aite Group’s Fraud & AML practice. “In addition to this, application fraud solution providers have had many compelling innovations, and solution providers have had notable expansions of range and diversity.”
What’s Next: Improving Application Fraud Controls
FIs have benefitted from investment strategies that prioritize transformation or expansion of segments of their KYC control framework that focus on Identity Verification (IDV) controls. This new emphasis on improving application fraud controls is evidenced by the 43% of FIs who planned to add vendors in 2020, with 29% planning to replace one or more current vendors with a new vendor.
Evidence also suggests that fraud executives believe there is room for improvement by means of tracking, recording, and articulating the performance of their application fraud control systems. Solution providers such as Early Warning Services were cited by FIs “as among those that play an important role in stemming the capacity of money mules, synthetic identities, and first-party fraudsters to spread from one FI to the next.” Early Warning provides solutions to help financial institutions better detect identity fraud and determine the likelihood of first-party fraud or account mismanagement—all in real time.
By partnering with the right vendors and providers, FIs will see positive changes in the number of fraudulent applications being submitted, and with a good fraud control framework, they can better detect and prevent criminals from accessing secure data.
To learn more about application fraud trends, you can download the Application Fraud: Trend Analysis and Mitigation Challenges white paper here.