SMB Lending Fraud is Up, and Non-Bank Providers are Most Impacted
Small business lending fraud increased almost 7% since 2020, according to a recent study done by LexisNexis Risk Solutions. They found that on top of fraud costing lenders time and money, increasing numbers hit the alternative financing space harder than any other lending sector.
“Seventy percent of the non-bank lenders that participated in the survey indicated that they had seen a rise in fraud attempts during the past year,” said Tom Hunt, Director of Business Risk Strategy at LexisNexis Risk Solutions when asked about non-bank lender experiences with fraud. “The other item of note regarding this group was that they reported the largest overall increase compared to the previous year in terms of fraud losses as a percent of revenue, growing from an estimated 6.8% to an estimated 8%, a more than 17% increase.”
The study found an increase in labor to combat fraud, especially as PPP fraud ran rampant during the pandemic, as well as a rise in spending on combating fraudulent business credentials or stolen identities that were trying to access PPP money. It also found an increase in mobile lending channels, where the study claims the largest share of lending transactions originate. In the mobile space, fraud losses are up over 10% for both non-bank lenders and big banks.
The study also found that lenders who had advanced or ‘layered’ identity protocols experienced significantly less fraud in their transactions. Although more of an initial investment, these protocols prevented companies who had them from being a part of the rise that took place during the pandemic.
Hunt spoke about the pandemic’s impact on fraud, and how it has raised costs for financiers who already have substantial overhead. “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,” said Hunt.
“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.”
When speaking further about the digitization of the approval process, Hunt spoke about the need for constant innovation in KYC protocols. According to him, the only way to combat the latest fraud is to have the latest security.
“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 Hunt.
“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 study casts blame on the pandemic as the main cause of rising fraud in the industry. With PPP fraud cases popping up all over the country, pandemic-induced fraud will be in the mix of financial scandals for many years to come. The entire study can be downloaded here.Last modified: February 25, 2022
Adam Zaki was a Reporter at deBanked.