SMB lending fraud has increased by a double-digit percentage year over year, with most lenders expecting fraud levels to increase in the coming months. This is one finding in the LexisNexis Risk Solutions Small and Midsize Business Lending Fraud Study. More than 80% of respondents said that SMB lending fraud has risen by nearly 14% over the last year, even as lenders are less willing to issue new credit.
SMB lending fraud is increasing at consistent rates but is gradually moving away from the pandemic’s influence. Notably, SMB lending fraud is typically caught within the first month of a new customer relationship.
Organizations recognize that reducing SMB lending fraud can increase revenues and improve customer loyalty. With most fraud losses attributed to digital channels, 70% of organizations have adjusted their strategies for detecting and mitigating fraud. This shift highlights a proactive approach within the industry, with many lenders tightening their mobile and online transaction policies. While smaller banks and credit unions balance their policies, larger institutions adopt stricter measures.
Key Findings on SMB Lending Fraud
Top Methods of Fraudsters
In the period surveyed, stolen legitimate business and consumer/owner identities have emerged as the most common type of SMB lending fraud, making detection particularly challenging. Recognizing that reducing SMB lending fraud can lead to increased revenues and improved customer loyalty, organizations are enhancing their detection capabilities. However, balancing fraud detection with minimizing customer friction remains a key concern.
Shift to Tech-Driven Fraud Prevention
There is an anticipated shift from labor-centric to tech-driven fraud prevention as companies face a recurring challenge in managing and mitigating fraud risks. SMB lending fraud is a shared concern across industries, with most companies anticipating overall losses between 6% and 10%. About 17% of these losses are due to efforts to reduce friction in approval processes.
Increase in Proactive Fraud Prevention
Businesses are enhancing their fraud prevention efforts by integrating advanced identity solutions like behavioral biometrics, geolocation and real-time transaction scoring to bolster their anti-fraud initiatives. Fintech and digital lenders have shown remarkable improvement in this area.
“Though the perception exists that SMBs have complex structures, our annual study shows that lenders employing a multi-layered solutions approach, integrated with cybersecurity and digital channel operations, experience more positive outcomes when lending to small businesses,” said Tom Hunt, director of business risk strategy at LexisNexis Risk Solutions. “These include reduced fraud losses as a percentage of annual revenue and a slower rate of increase in SMB lending fraud.”
Top Four Recommendations for Preventing SMB Lending Fraud
Enhance Identity Proofing
Identity proofing encompasses both verification and authentication processes. While verification is a critical step, it may not be sufficient on its own to detect sophisticated fraud attempts.
Authentication solutions offer a more dynamic and advanced approach to fraud detection and prevention, especially in remote channel applications where the risk of fraud is higher. Additionally, businesses need advanced fraud detection systems beyond manual methods. Utilizing technology is essential for effectively identifying and addressing fraud while minimizing inconvenience to customers.
Adopt a Multi-Layered Approach
Businesses should implement a multi-layered approach to authentication by combining different solutions to address unique risks from different channels, payment methods and products. This approach should integrate cybersecurity with fraud prevention efforts and employ advanced solutions like OTP/two-factor authentication, biometrics and behavioral biometrics.
Focus on Early-Stage Fraud Detection
New account opening is a crucial stage in the customer journey and fraud assessment at the point of origination. Maintaining robust screening solutions while managing the right amount of friction is key. This includes checks for fake or suspicious identification numbers, such as Social Security Numbers and Tax Identification Numbers. Many fraud cases are identifiable and then prevented by enhancing the screening process.
Share Intelligence
Businesses should leverage the power of collective intelligence through consortiums and digital identity networks. By participating in a consortium, companies can share valuable data, creating a peer-based intelligence layer that allows them to gain greater context, secure their digital channels against cybercriminal networks and make smarter, real-time risk decisions.