Small Business Lending Fraud Expected to 'Worsen' in Coming Months, Study Finds

Between 2021 and 2022, officials from credit unions, smaller banks and fintechs reported fraud levels increased 14.5% and that they are very worried about the fraud challenges ahead.

In a report released Wednesday from LexisNexis Risk Solutions, the Atlanta-based company surveyed nearly 150 individuals at credit unions, banks, fintech/digital lenders and payment processors to better understand the small business lending fraud landscape.

The survey, conducted between September and October of 2022, focused on “how institutions identify and track fraud, the types of fraud experienced, what institutions are doing to combat fraud” and if there are differences in small business lending fraud based on the size and type of the lender.

The survey found fraud losses could represent “up to 15% of overall losses” for the organizations surveyed. Nearly 19% of small business lending losses have come from the acceleration of digital transactions in a post-pandemic world, with fintechs experiencing the highest amount of fraud expenses.

According to the survey findings, 72% of respondents said they expect lending fraud to continue to increase over the next 12 months.

Of note, credit union trade groups said in April that new rules by the U.S. Small Business Administration will increase risks of fraud by under-regulated fintechs after the SBA announced new rules to take effect May 11 in which the SBA will increase the number of Small Business Lending Company (SBLC) licenses.

At the time, NAFCU President/CEO Dan Berger said, “Allowing unregulated fintechs to participate in these programs heightens fraud risks — as evidenced by the alarming results of the Paycheck Protection Program. NAFCU firmly believes that credit unions represent the best and safest financial option for Americans, and we will continue to advocate for the SBA to safeguard the integrity of its essential programs from fraud-prone fintechs.”

According to the survey, more than half of small business lending applications come through online and mobile channels “with a similar proportion of fraud losses attributed to these channels.”

LexisNexis Risk Solutions Director of Business Risk Strategy Tom Hunt 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. 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.”

According to LexisNexis, the survey also revealed the three top recommendations for preventing small business lending fraud:

1. 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.

2. Take a 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.

3. 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 customers, determine their point of access, and distinguish them from fraudsters and malicious bots.

A copy of the LexisNexis 2023 Small Business Lending Fraud Study can be found here.