When Merchants Defraud Lenders

Back when lenders used to visit the site of a merchant’s business, a “doctor” once hired actors to play nurses and patients to give the illusion of a thriving medical practice when the lender came to check in on the business before financing it. The doctor’s office looked legitimate, it got funded and the fraudster ran off with the money.         

This story was shared last night by Lowell Isaacs, Chief Credit Officer at Fora Financial, as part of an anti-fraud panel discussion organized by Ocrolus.  Meanwhile, another panelist relayed a story about a nine-year old who was cheating the system at a chess club he brings his son to.

“If kids can do it, customers can do it too,” said Vivek Nasta, VP of Product at Ocrolus, which designs and implements technology to verify the authenticity of financial data, primarily bank statements.

Another panelist, CEO of PeerIQ Ram Ahluwalia, spoke about synthetic fraud, or people using manufactured identities.

“They”ll be a very good payer and then three years later, they’ll draw out all the money and disappear,” Ahluwalia said.

Nasta spoke of how, after the financial crisis, it became impossible to get a loan from banks. And what developed, Nasta said, was “a race for customers” to fill the void that banks left. Since the online lenders were competing – and still do – around speed, he said that customers started assuming that they could get money very quickly.

Isaacs acknowledged the role that funders played in rushing money to merchants.

“In some ways, this is something we’ve brought on ourselves,” Isaacs said. “I’m not sure it was a demand issue. I think a lot of it came from the supply side.”

Ahluwalia, however, acknowledged that many legitimate borrowers, particularly consumer borrowers, do prioritize speed over rate, often because they have no savings for emergencies.

“I hope you’ll never see a lender fund a merchant instantly,” said Yaakov Erlichman, VP of Fraud at Kabbage, “unless they have all the data on that merchant.” Granted, Kabbage can already approve a merchant in less than 10 minutes, so Kabbage is definitely focused on speed.

Everyone on the panel seemed to agree that it’s impossible to eliminate fraud altogether.

Nasta said that Ocrolus can protect against counterfeiting by recognizing, say, that the font of one character in a Bank of America bank statement is a font that hasn’t been used by Bank of America in 10 years. Kabbage’s Erlichman told deBanked he believes that  fraudsters are not just random guys in their basement, but rather highly organized teams of people who spend their days creating fake identities and applying for loans. Still, he said that the number of people trying to defraud Kabbage is very small.  

“99.9% of our customers are good actors,” Erlichman said, “so you want to make their experience awesome.”

Todd Stone was a reporter for deBanked.