LexisNexis: Small Business Lending Fraud On the Rise

May 13, 2023

LexisNexis® Risk Solutions has published its latest Small and Midsize Business (SMB) Lending Fraud Study, revealing a significant uptick in SMB lending fraud over the past year. According to the survey, lenders, including smaller banks, credit unions, and fintechs, are bracing for a further escalation in fraud levels in the coming year.

The study found that 84% of respondents observed an increase in SMB lending fraud, with an average year-over-year rise of 14.5% from 2021 to 2022. This substantial surge contrasts sharply with the 6.9% increase recorded in the previous year.

Most common fraud types include bogus business credentials and fake consumer/owner identities. However, lenders also reported a growing trend of legitimate business and synthetic identity fraud, posing significant challenges to effective mitigation.

The rising tide of fraud is attributed to several factors, including insufficient efforts to curb SMB lending fraud, economic uncertainties, and a perception that SMBs are softer targets than consumers and online/mobile channel transactions.

Key Findings on SMB Lending Fraud

SMB Fraud Losses: SMB lending fraud losses could account for up to 15% of total losses for the surveyed institutions. Approximately 19% of SMB lending fraud losses are linked to the post-pandemic surge in digital transactions. The average value of SMB lending fraud losses as a percent of annual revenues remains higher than pre-pandemic levels (5.5% overall), with fintechs bearing the brunt of fraud expenses.

Remote Channel Risks: More than half of lending applications from SMBs are submitted via remote channels (online/mobile), with a similar proportion of fraud losses attributed to these channels. In the post-pandemic market, most lenders have shifted their strategies to detect and mitigate SMB lending fraud in online and mobile transactions, which involves investment in training, increased staffing, and the introduction of fraud detection technology like geolocation and behavioral biometrics.

Fraud Prevention Focus: SMB lenders anticipate further investment in fraud prevention. Some are launching special fraud prevention initiatives and spending more on vendor solutions to curb SMB lending fraud. However, the use of digital identity and advanced transaction verification solutions remains limited due to barriers such as the lack of time to train staff, competing budget priorities, and solution costs.

Tom Hunt, director of business risk strategy at LexisNexis Risk Solutions, said, “The study shows that lenders using a multi-layered anti-fraud approach that integrates fraud prevention measures with digital channel operations can be more effective at detecting and mitigating fraud and its costs early.”

Recommendations for Preventing SMB Lending Fraud

Digital Identity Assessment: Organizations must move beyond manual processes and limited technologies to confirm the authenticity of individuals and reduce challenge rates, manual reviews, and costs.

Multi-Layered Solution Approach: A single solution approach is insufficient. A robust, multi-layered authentication defense should include a platform that incorporates real-time event data, third-party signals, and global, cross-channel intelligence.

Endpoint Protection: The point of new account opening, where fraudsters can establish themselves, should be secured using technologies that recognize customers, determine their point of access, and distinguish them from fraudsters and malicious bots.

This study underscores the urgent need for SMB lenders to reassess their anti-fraud strategies and invest in multi-layered solutions to protect themselves and their customers from escalating fraud threats.

Image: Depositphotos

This article, “LexisNexis: Small Business Lending Fraud On the Rise” was first published on Small Business Trends



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