LexisNexis Risk Solutions released its latest Small and Midsize Business (SMB) Lending Fraud Study. Based on a survey of lenders, SMB lending fraud has increased significantly during the past 12 months, with many smaller banks, credit unions and fintechs expecting fraud levels to worsen over the next year. Overall, 84 percent of respondents said that SMB lending fraud has increased at an average of 14.5 percent year-over-year (2021 to 2022), a significant increase from the 6.9 percent increase experienced the year prior.
 
Although bogus business credentials and fake consumer/owner identities remain the most common type of SMB lending fraud, lenders are also experiencing more legitimate business and fake or synthetic identity fraud which they find challenging to mitigate effectively. Most lenders attribute increased fraud to multiple factors including lack of effort on curbing SMB lending fraud, market economic uncertainties and the perception that SMBs are an easier target than consumers and online/mobile channel transactions.
 
Key Findings on SMB Lending Fraud

• The Overall Impact of SMB Fraud Losses: SMB lending fraud losses could represent up to 15 percent of overall losses for the institutions surveyed. About 19 percent of SMB lending fraud losses stem from post-pandemic acceleration of digital transactions. The average value of SMB lending fraud losses as a percent of annual revenues remains higher than before the pandemic (5.5 percent overall), with fintechs continuing to experience the highest fraud expenses. This reflects a slight decline representing percentages closer to early pandemic figures after spiking as the pandemic progressed.

• Remote Channel Risks: SMBs submit more than half of lending applications through remote channels (online/mobile), with a similar proportion of fraud losses attributed to these channels. Banks and credit unions are experiencing a limited uptick of in-person loan applications and fraud losses as most banks resume normal in-person operations. In the post-pandemic market, most lenders have changed their approach to detecting and mitigating SMB lending fraud with online and mobile transactions. This includes investing in training, increasing staff and adding fraud detection technology like geolocation and behavioral biometrics.

• Focusing on Fraud Prevention: SMB lenders expect that they will continue to invest more in fraud prevention, with smaller banks and credit unions, fintechs and those with mostly digital channels being particularly likely to increase staffing on fraud teams. Some lenders indicate that they are also launching special fraud prevention initiatives and spending more on vendor solutions to curb SMB lending fraud. While more SMB lenders indicate use of email and phone risk verification than previous years, the use of digital identity and advanced transaction verification solutions remains limited. The most common barriers to investing in fraud mitigation technology include the lack of time to train staff, competing budget priorities and cost of solutions.

 “The study shows that lenders using a multi-layered anti-fraud approach that integrates anti-fraud measures with digital channel operations can be more effective at detecting and mitigating fraud and its costs early,” said Tom Hunt, director of business risk strategy at LexisNexis Risk Solutions. “This also includes solutions that assess both the physical and digital identity attributes, as well as the risk of the transaction itself. Best practice fraud detection and mitigation involves a layering of complementary solutions to address unique risks from different channels, payment methods and products to address every touchpoint across the customer journey.”
 
Top Three Recommendations for Preventing SMB Lending Fraud

• Assess Digital Identity Attributes: Authentication is about confirming that the person is who they say they are. To minimize fraud, organizations can no longer rely on manual processes with the assistance of limited technologies or point solutions to reduce challenge rates, manual reviews and costs.

• Multi-Layered Solution Approach: A point solution approach is inadequate. Devices, geographies and user behaviors, such as transaction patterns, payment amounts and payment beneficiaries, are becoming more varied and less predictable as consumers transact across locations. A multi-layered, strong authentication defense approach should include a single authentication decision platform that incorporates real-time event data, third-party signals and global, cross-channel intelligence.

• Protect Endpoints: New account opening is the customer journey point where fraudsters can become established, causing problems at later stages. It is also the first point of contact for many legitimate customers – too much friction and they may abandon the effort. Use technologies that recognize your customers, determine their point of access and distinguish them from fraudsters and malicious bots.

 The study surveyed 147 individuals working at banks, credit unions, fintech/digital lenders and payment processors with responsibility for risk and fraud assessments or decisions for SMB customers. SMBs are businesses earning up to $10 million annually. The study set out to better understand SMB lending fraud, specifically its volume, how institutions identify and track fraud, the types of fraud experienced, what institutions are doing to combat fraud and whether there are differences in SMB lending fraud based on the size or type of organization. Global market research firm KS&R collected respondent data by phone during September and October 2022.