Report: SMB lending fraud increasing

Small and midsize business lending fraud has significantly increased and will likely grow again in the next 12 months, according to a LexisNexis survey. 

The report, taken from September to October, included 147 responses from small and large banks, fintechs and digital lenders and payment processors. According to the survey, smaller banks last year said on average that SMB lending fraud had increased by 13.2 percent, compared to 7.3 percent in 2021. 

Remote transactions were driving much of the fraud, though a slight uptick in fraud was also seen with in-person loan applications and fraud losses. Though more lenders reported catching SMB lending fraud at the point of account origination, most fraud is still being caught after that. “A majority of lenders attribute increased fraud to multiple reasons, such as a lack of effort on curbing SMB lending fraud, market economic uncertainties, the perception of SMB to be an easier target than consumers and online/mobile channel transactions are perceived drivers of increased fraud,” LexisNexis stated. 

Many smaller banks, credit unions and fintechs expected fraud levels to worsen even more over the next 12 months. They said they planned to invest more in fraud protection, whether by increasing staffing on fraud teams, starting fraud prevention initiatives and spending more on vendor solutions to curb SMB lending fraud. “Lenders which use a multi-layered solutions approach that integrates with cybersecurity and the digital channel operations can be more effective at detecting and mitigating fraud and its costs early,” the report stated. 

According to the report, losses from SMB fraud likely represent up to 15 percent of overall losses. Nearly 20 percent of such hits are attributable to post-pandemic changes to how transactions occur. At 5.5 percent, the average value of SMB lending fraud losses as a percentage of annual revenues remains higher than before the pandemic, with fintechs continuing to see the largest hit. 

“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,” LexisNexis stated. “The more common barriers to investing in fraud mitigation solutions include the lack of time to train staff, competing budget priorities and cost of solutions.” 

Types of fraud included in the survey were bogus businesses, in which either an existing business entity or a non-existent business was fabricated; the takeover or misrepresentation of business ownership; and the use of a fake or stolen consumer identity. 

“Although bogus business credentials and fake consumer/owner identities remain the most common type of SMB lending fraud, there has been an increase in the number of smaller banks/CUs and fintechs also experiencing legitimate and stolen business credentials fraud,” LexisNexis stated.

SMB lenders said the top barriers to implementing preventative measures include a lack of time to train new staff; competing budget priorities; and high implementation costs. Seventy-three percent of lenders said preventing fraud while minimizing customer friction was becoming more challenging. Sixty-nine percent said SMB lending fraud is inevitable and costs too much to control.