LexisNexis Risk Solutions Finds Significant Increase in Small and Midsize Business Lending Fraud Primarily within Digital Channels
Fraud losses to lenders equal 5.4% of annual revenues and are highest for lenders that that conduct more transactions online
LexisNexis® Risk Solutions has released its annual Small and Midsize Business (SMB) Lending Fraud Research Report. The report reveals that 71% of lenders surveyed report that SMB lending fraud incident levels have risen over the past 24 months, at an average of 8.3%. This is especially true for lenders that conduct more transactions online. Eighty percent of these lenders report an average of 9.7% increase in fraud amount from what they saw two years ago.
“Traditional” banks and credit unions are now anything but traditional. They have moved a large portion of their SMB loan application processes into online channels. Four in 10 survey respondents from banks or credit unions now say they accept 80% or more of their SMB loan applications through online and mobile channels. This is in spite of the complex nature of SMB fraud and the perception that the mobile channel presents a significant risk of fraud.
The monetary impact of SMB lending fraud has also increased since last year with losses increasing from 4.2% to 5.4% of annual revenues particularly for lenders that conduct more transactions online. However, larger institutions experienced the most transaction growth – up 58.6% since last year. Given heavy usage of the online and mobile channels, most SMB lending fraud losses occur through these channels and as the result of synthetic identity, account takeover and third party identity fraud.
“The digital channel environment continues to grow. Customers and prospects expect this option and it’s even truer now since in-person transactions are more challenging,” said Ben Cutler, vice president, business risk and specialty markets, LexisNexis Risk Solutions. “Fraud is also more complex with criminals looking for new ways to attack these institutions and evolve their tactics. This means that fraud will continue to increase if lenders do not put proper fraud prevention protocols into place.”
“Lenders conducting transactions remotely will also see an increased risk for customer friction and churn if they do not act now. Both large and small lenders that conduct significant remote channel transactions should prioritize a multi-layered risk solution approach. There is no one-size-fits-all model and lending firms with digital channel business models should implement the right tools that work for online and mobile,” added Cutler.
Respondents expect SMB lending fraud for 2020 to increase at nearly the same rate as for the previous 24 months. The average expected overall growth is 7.1% and lenders that operate heavily in digital channels expect over an 11% increase in fraud. Combatting this type of fraud is, however, a key corporate priority. Many lenders are increasing their levels of fraud prevention investment by more than 11% over last year. This investment will take the form of increased staffing of fraud teams and higher spend on vendor solutions.
The Impact of COVID-19 on SMB Lending Fraud
Shortly after the conclusion of this study, the U.S. lending industry began seeing impacts of COVID-19. LexisNexis Risk Solutions revisited a small sample of March 2020 study respondents in June 2020 to assess how the developing economic and geopolitical consequences of the pandemic were challenging SMB lenders.
The takeaways find that the types and frequency of SMB fraud remain consistent with pre-COVID levels. Respondents note a slight increase in the frequency of stolen legitimate business identity and stolen consumer/owner identity fraud. This coincides with the application period for SMB Paycheck Protection loans and suggests that fraudsters tried to take advantage of the program, likely through both first and third party fraud. According to The New York Times, the U.S. Department of Justice has “made at least 41 criminal complaints in federal court against nearly 60 people, who collectively took $62 million from the Paycheck Protection Program by using what law enforcement officials said were forged documents, stolen identities and false certifications.”
Opinions are also nearly evenly divided on the expected time to return to typical pre-COVID SMB lending levels. Fifty-six percent of respondents feel it will take at least nine months to return to even two-thirds to three-fourths of the level of business they did before the pandemic. This indicates that a majority of the lending industry expects it will take considerably more than nine months to return to what was once considered normal lending volume.
The study surveyed 135individuals for risk and fraud assessments or decisions for SMB customers. The study set out to better understand SMB lending fraud, specifically its volume, how it is identified and tracked, the types of fraud experienced, what is being done to combat it and whether there are differences in SMB lending fraud based on the size or type of organization. LexisNexis Risk Solutions collected respondent data by phone during February – March 2020.