Small Business Loan Fraud Puts FinServ On High Alert

Though fraud technology has evolved to combat the monster of payments fraud, there is a growth threat for banks that innovators are also paying attention to as financial institutions (FIs) increase their appetite for such tools.

Loan fraud is a less-discussed — but not less threatening — trend hitting banks, credit unions and other financial service providers, particularly as traditional and alternative players usher in digitization and an online-only lending process. In consumer lending, fraudsters might steal a consumer’s identity to apply for a loan, or a consumer may apply for a loan with no intention of repaying it.

In response, FIs are prioritizing credit assessment, underwriting and borrower verification processes, and finding that technology can be instrumental in bolstering their fraud mitigation strategies. However, according to new research from LexisNexis, loan fraud is now moving into the small business (SMB) front, leading to similar cases of small business loans taken out with no intent to pay, loans obtained via false small business identities or multiple fraudulent small business loans taken out for a single borrower.

According to LexisNexis Risk Solutions’ 2019 Small and Mid-Sized Business Lending Fraud Survey, FIs are losing a significant portion of their revenues to small business loan fraud — and those losses are hitting smaller institutions, credit unions and online lenders harder than big banks.

The report noted that large banks are losing an estimated 2.9 percent of overall revenue to lending fraud, compared to as much as 5.8 percent for smaller banks. Though FIs have proven successful in their fight against consumer loan fraud, fraudsters’ shift to SMB loan fraud is augmenting the threat. Criminals will deploy tactics similar to consumer loan fraud when targeting the SMB lending process, the report noted — assuming fake identities or creating synthetic ones, deploying cyberattacks to infiltrate account creation or launching account takeover tactics.

As small business lending continues to migrate online, the report added, fraudsters have a larger opportunity to attack: Cyberattacks targeting new small business account creation have jumped 35 percent in the last six months alone. Identity spoofing, meanwhile, has increased 20 percent.

Technology’s Role

Researchers suggest that smaller players in the SMB lending market lack adequate resources to invest in the kind of technology necessary to boost security and mitigate fraud risks.

“Small banks and credit unions — undoubtedly an important part of our economy — experience higher rates of lending fraud, and our surveys suggest this is due to lower investment in technology and greater reliance on human assessments,” said LexisNexis Risk Solutions Vice President of Business Risk and Specialty Markets Ben Cutler in a statement.

In PYMNTS’ latest Digital Fraud Tracker, Chase Head of Digital Authentication Andrew Sloper explained the role of machine learning in taking a proactive approach to banks’ anti-fraud efforts. Machine learning, he explained, can be instrumental in identifying patterns of customers’ behavior, and thus being able to identify when those patterns shift, or when behavior becomes anomalous — and potentially fraudulent.

“The heart of our approach is very much a customer-centric approach to authentication, [in which we] profile the data that is used to distinguish between a customer’s typical good behavior and a fraudster’s bad or suspicious behavior,” he said, adding that Chase “never [relies] singly on one of our control layers. Those controls span our perimeter defenses.”

Artificial intelligence and machine learning — and the data analyzed by it — are critical components of banks’ fraud efforts. As the Digital Fraud Tracker noted, Visa‘s latest research found that banks, FinTech firms and merchants expect the risk of fraud to rise as more payment technologies emerge.

However, as regulators, banks and other financial service providers alike turn their attention to how technology can address the threat of payments fraud as payments technology evolves, similar efforts should be made to target small business loan fraud as the small business lending sector makes similar innovation inroads.