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What Is Application Fraud And What Are The Measures To Prevent It?

If you have ever watched the movie ‘Catch me if you can’, you must have realized how smartly the lead actor uses false checks to commit sensational frauds. Such movies perfectly picturise the concept of banking and application frauds. Note that fraud is an unlawful activity, and in India, the fraudster is liable to hefty fines or even years of imprisonment. Application Fraud is one of the several types of identity frauds where an applicant uses their own name but makes an application for an account, policy, service or insurance claim containing false information for the purpose of influencing the outcome of the application. 

Today, banking fraud has developed into a sophisticated business that operates by manipulating the multiple loopholes prevalent within a financial institution. The digital world, with its anonymity and ease of database access, provides a perfect setup for a fraudster to commit the crime than ever before. The fraudster creates or robs an identity, establishes a legit credit history, wins the trust of the lenders and finally when the money is in, puts up their biggest disappearing act. 

Due to the extreme competition and the fear of losing out on customers to competitors, many banks are accepting account opening and loan application online via digital devices, even exempting the applicant from actually being present at the bank office. This cuts short the time available for conducting thorough due diligence on a customer. While reduced paperwork has saved a lot of time (and even the trees), it has disabled financial institutions to verify applicants in person with the use of photo IDs such as drivers’ licenses, passports, and other documents. On the other hand, it is argued that the digital platform is more secure and concrete than paper because apparently, digital channels draw a more detailed and complex view of the applicant using checkpoints such as device fingerprint, IP address, geolocation and more.

Application fraud often starts with identity theft. There are three key types of frauds: identity theft, identity manipulation, and synthetic identity theft. Of these, synthetic theft is most difficult to identify. Synthetic identity theft is a type where the applicant creates either a completely new ‘faux identity’ or strips the identity off a deceased person. In this way, no one can raise a complaint against such theft which makes it so hard to spot.

How Do Fraudsters Give Personality to A Fraudulent Account? 

Once a fraud identity is created, a fraudster uses various methods to add credibility to the account. For instance, the fraudster uses the newly formed identity to apply for credit cards and loans. The lender submits the information to the credit bureaus. If there is already a file for this account then a score is sent, if not, a new file is created. Whatever the case, this helps add substance to the identity and makes it look more real. The fraudster can also add themselves as an authorized user on an existing real account. Once a credit score due to the association is developed, the fake user can separate itself to form an individual file.

Measures to Detect & Prevent Application Fraud

In order to prevent fraud from happening, there should be a validation at multiple levels. Identity verification should be performed to confirm whether an applicant’s details match historical records derived from credit bureaus and other sources. It is important to KYC before you extend your contract to them. Conduct simple cross-checking techniques like PAN verification which also help link different aspects of an account to ascertain the identity. IDENCHECK is an application from CRIF that allows you and your branches to verify KYC details of your customers against many Government databases at a click of a button. Identity authentication helps verify further if the person is the actual owner by asking them secret questions only they would be able to answer. Finally, by conducting device verification, you can analyze whether the same device was used to apply for multiple accounts or whether the IP seems blacklisted, etc.

Identification and Anti-Fraud Solutions from CRIF

One of the more contemporary and advanced antifraud solutions can be to use the expertise of machine learning. Machine learning finds and learns from patterns in the data and can work on scenarios learned from past experience. ML can detect whether payments from the same source is being used to pay unrelated accounts? Whether the same device being used to access and/or make a payment on what appear to be unrelated accounts? Etc. Sherlock Lending, CRIF’s anti-fraud solution for lenders is empowered with features such as Intelligent Search leveraging on matching, Network and Machine Learning algorithms. With SHERLOCK you can:

  • Control fraud rates better
  • Lower the review time for suspicious cases
  • Lower the operational cost with higher returns
  • Configure and design ML rules yourself
  • Enjoy connectivity to a vast & ever-expanding data network

Credit Bureaus – What Do They Mean for You?

Credit bureaus are also known as Credit Information Companies (CICs) in India, are organizations which collect credit data related to loan and debt repayment history for individuals, businesses, and firms. They provide this data to financial institutions such as banks and NBFCs as personal credit score and credit report whenever an individual approaches a bank/financial institution to avail loan and as a business credit score and credit report whenever a business or a firm approaches a bank/financial institution seeking a new credit facility.
                A credit bureau in India is licensed by the Reserve Bank of India and governed under The Credit Information Companies (Regulation) Act, 2005 also known as CICRA 2005. The Act of 2005 was enacted to regulate CIC’s in India and facilitate efficient distribution of credit and for matters concerned with it. RBI has licensed four credit information companies in India, CRIF High Mark is one of the leading ones. These CICs are different from credit rating agencies that operate in India.

How does a Credit Bureau operate:
                 A credit bureau partners with banks, NBFCs, Housing Finance Companies, Microfinance companies, credit card companies, and other financing companies to collect loan and credit card data of all of their customers at least on a monthly basis. The credit bureau processes this data to create credit reports of each such customer.
Whenever an individual/firm applies for a loan or credit with a lender such as a bank, NBFC or any other financial institution, the lender contacts its credit bureau to get the credit score and detailed Credit Report of the applicant. The Credit bureaus only provide information and do not provide any opinion, indication or comment pertaining to whether credit should or should not be granted. The credit grantor such as bank or NBFC which received the application for credit takes the credit decision based on its internal credit approval policy. The policy will consider not only the credit score and the credit history but also many other parameters such as income, income source, collaterals, etc.
                  A credit report depicts the ‘credit history’ of customers listing down all loans and credit facilities availed by the customer, repayment of EMIs and credit card dues on these facilities, and outstanding balances on these facilities.
                  The credit report is also accompanied with a credit score, a 3-digit number which ranges from 300 to 900 where a score of 900 is considered the best possible score; the better the score the more the probability of securing a loan.  A credit score of 700 and above is generally considered acceptable by most banks and NBFCs in India. The score with different bureaus for the same individual could vary to some degree due to the underlying proprietary methodologies.
                  Credit Bureaus also support banks and NBFCs with a variety of value-added services by transforming the data collected into insights and advanced analytics.

Free Credit Score:
              Credit Bureaus also provide a facility on their website to individuals as well as businesses to check their own credit score and credit report. You generally need to buy your credit report and credit score. But if you are an individual, you can access one detailed report, free of charge, once a year, from any of the credit bureaus in India. You can access your personal credit score in three simple steps and get your score in a few minutes. You will have to share basic details such as your name, address, phone number, date of birth, Permanent Account Number (PAN) and email address. If you find any discrepancy in your credit report, you can also rectify any errors that may be there, through a dispute resolution process.

CRIF High Mark:
              CRIF High Mark is an RBI authorized credit bureau in India. It is India’s only multifunctional credit information company catering to all kinds of borrowers, ranging from retail consumers, MSMEs and commercial borrowers to microfinance borrowers & more. It provides credit scoring and analytics services to banks, NBFCs, MFIs, Insurance companies, Fintechs, and Telecom players.
              CRIF, which owns majority in CRIF High Mark, is a leading FinTech from Continental Europe which specializes in credit information, business information, analytics, scoring, decision and credit management solutions. It has operations in over 50 countries across 4 continents. CRIF in India now also offers Business Information Report, Analytics & Scoring services, and Credit Management and Decision solutions.