Application fraud is a big problem for businesses, and it’s only getting worse. Experts consider it to be one of the top five fraud trends in 2022. It’s estimated that 37% of US consumers experienced application fraud in the past two years, creating a big problem for the businesses and institutions that serve them. 

Businesses spend a lot of time, money, and resources to remedy and counter the impacts of application fraud. The costs can multiply rapidly when it is carried out. From the time and money to process a fraudulent application to the resources it takes to discover the problem, to the cost of cleaning up a fraudulent account and potentially compensating the customer, application fraud is an expensive threat. 

Tools like’s Application AI can lower the risk of application fraud by verifying legitimate customers and vendors while stopping fraudulent ones before they can cause further harm. As you consider your company’s approach, here’s a quick guide to what is application fraud — and how Application AI can help you build a strong defense.

What is application fraud?

First and foremost: What is application fraud? It is a type of fraud in which an individual or group submits fraudulent applications for products or services. This can include things like applying for credit cards, loans, or insurance policies using false or stolen information. 

[Read more: Detect Fraudulent Credit and Account Applications]  

Consumers want to be able to access services instantly — such as online banking, e-commerce, and other financial services. This creates the perfect opportunity for fraudsters. Businesses and financial institutions provide online applications to meet consumer demand, but this puts the business at risk.. 

For instance, one common type of application fraud is third-party fraud. This is when a criminal uses someone else’s identity or a synthetic identity to apply for a loan or credit card. The criminal may be able to get away with this if they know enough about the victim’s personal information. Once the criminal has the loan or credit card, they can max it out and disappear.

Fraud perpetrators are able to submit fraudulent applications at scale, thanks to technology. Organized, large-scale fraud groups will use bots, cloud infrastructure, and virtual machines to submit hundreds of thousands of applications at a time to different financial institutions. These tools and techniques are able to make the applications appear legitimate — which is why these attacks are so successful.

Here are some other common types to be aware of. 

Types of application fraud

Application fraud comes in many forms, which makes it difficult to stop. 

Credit card application fraud is one common option, in which the fraudster applies for a credit card using false or misleading information. They then max out the card and never pay it back. 

As mentioned, credit card application fraud can either be carried out by a third party or take the form of first-party fraud. First-party fraud occurs when a person applies for a credit card using false or inaccurate information. 

Bust-out fraud takes this scheme to the next level. In this scenario, a fraudster uses stolen or synthetic identities to apply for loans and lines of credit over time. This criminal will behave like a legitimate customer, building good credit and increasing the lines of credit. Then, suddenly the fraudster maxes out the credit lines, drops the accounts, and disappears.

Other application fraud types concern loans, mortgages, and other financial instruments. No matter what this form of fraud takes, a fraudulent application is most frequently created using synthetic identities. 

As notes, “Synthetic identities have made it harder to spot because bad actors create new identities as opposed to stealing them from existing individuals. They incorporate disparate elements of real identities so they look more realistic, too, such as a Social Security number from one victim and the address of another.” 

Application fraud: impact on businesses

Application fraud can have a big financial impact on businesses. According to some estimates, up to 10% of banks’ bad debts — loans they won’t be able to recover — result from this type of fraud. 

Businesses that are victims can lose money in a number of ways, including:

  • Chargebacks: If a fraudulent application is approved, the business may be liable for the cost of the product or service that was purchased. The business may also be responsible for any associated fees, such as late payment fees or interest charges.
  • Increased costs: Businesses may need to invest in additional security measures to prevent future fraud, as well as hire additional staff to investigate and respond to fraudulent applications.
  • Loss of revenue: If a business is unable to process legitimate applications due to fraud, it may lose revenue. For example, a business that is unable to approve credit card applications may lose out on sales.

That’s not to mention the hidden costs of application fraud, including the reputational risk. It can damage a business’s reputation, leading customers to mistrust the institution. This can then lead to a decrease in sales and customer loyalty. 

How to stop fraudulent credit applications

The first step toward building a strong defense against application fraud is to implement a machine learning tool like Application AI.

Application AI can analyze loan applications, bank account openings, credit card applications, and more for signs of fraud, such as inconsistencies in the applicant’s information, unusual activity, or patterns that suggest the application may be fraudulent. This can help businesses to identify and reject fraudulent applications before they are approved. 

In addition, Application AI spots duplicate accounts, synthetic identities, and bots, and helps with credit checks. Clients that have implemented Application AI report the ability to not only approve applications 63% faster but also proactively detect four times more fraud. 

Businesses should consider implementing a multi-layered approach to application fraud. Look for a comprehensive platform that enables you to add ID verification and facial recognition software, identity data validation, identity data validation, and more. 

[Read more: Top 7 Steps for Preventing Loan Application Fraud]  

Software can make a big difference in your anti-fraud efforts, but it’s not a silver bullet. Other best practices for avoiding this fraud include regular activities such as: 

  • Requiring applicants to provide proof of identity, such as a driver’s license, passport, or other government-issued ID.
  • Checking applicants’ credit reports to identify any red flags. 
  • Providing training to those reviewing applications; if an application seems too good to be true, it probably is.
  • Asking for additional documentation or a third-party verification (such as a former landlord’s recommendation). 

Using artificial intelligence for fraud detection is a great option for organizations that process dozens or even thousands of applications daily. Application AI is a scalable solution that’s part of’s complete suite of fraud risk reduction tools. Learn more and protect your business by signing up for a free demo today.