Small to Mid-Sized Business Lending Fraud Increased 6.9% Since 2020, with More Than One-Third of Growth Attributed to the Pandemic
LexisNexis Risk Solutions released its latest Small and Midsize Business (SMB) Lending Fraud Study. The survey of risk and fraud executives at financial institutions reveals that SMB lending fraud in the United States has increased 6.9% since 2020. SMB lending fraud losses account for a significantly higher percent of financial firms’ annual revenues year-over-year at an 6.2% increase overall, with larger banks with more than $10 billion in revenue and fintechs/digital lenders seeing the sharpest year-over-year increase.
Key Findings on SMB Lending Fraud
- Labor-Focused Spending Increased:Â More fraud prevention costs have involved labor compared to early 2020, as lending faced increased loan requests because of the Paycheck Protection Program and battled more fraud related to counterfeit business credentials and fake or stolen consumer identities associated with businesses applying for loans.
- Increase in Mobile Channels:Â Online and mobile channels continue to represent the largest share of lending origination transactions. Mobile channel fraud losses have increased 10% or more, particularly among fintechs and larger banks.
- Layering Solutions Lessens Cost:Â Lenders that layer more advanced identity authentication with advanced transaction/identity verification solutions experienced a lower rate of increased fraud overall and the pandemic had less of a fraud impact on these institutions.
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“The digital channel environment is upon us and continues to grow as customers and prospects expect digital lending options, particularly during times that make in-person transactions more challenging,” said Tom Hunt, director of business risk strategy, LexisNexis Risk Solutions. “At the same time, fraud is evolving and has become more complex for lenders. Various risks can occur simultaneously with no single solution to solve for all of them. To be effective, fraud tools now need to authenticate both digital and physical criteria simultaneous with identity and transaction risk.”
The results of the survey illustrate the deep impact that the pandemic had on lending, contributing largely – more than one-third – to the increased costs associated with SMB lending fraud. Respondents indicated that the pandemic negatively impacted them through both increased fraud and more complexity in fraudster methodology than before. Stolen legitimate business and consumer identities and the use of synthetic consumer identities make it incredibly difficult for lenders to distinguish between legitimate and fraudulent loan requests.
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The pandemic forced many lenders to make changes to their fraud detection and mitigation approaches, particularly among fintechs and larger banks, leading to higher labor costs. However, though those processing a sizeable volume of loans through digital channels indicate an even larger pandemic-related cost increase, fintechs and larger banks appear to be following best practices of integrating the digital/customer experience within their fraud prevention solutions.
Continues Hunt, “The impact of the pandemic on costs associated with lending fraud is clear, although there is no one-size-fits-all model to solve for SMB fraud. When employing a layered solution approach, lending firms with digital channel business models should implement solutions for their unique channel issues and fraud. One of the best fraud prevention approaches involves a layering of different solutions to address unique risks from different channels, payment methods and products. This approach also allows lenders to integrate additional capabilities and operations more easily within their fraud prevention efforts.”
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