Deep fake lending fraud is real, researchers warn

Lenders servicing the small and midsize business (SMB) community have seen an uptick in SMB lending fraud, according to a new study by LexisNexis Risk Solutions. Based on a survey of 147 bank, credit union, fintech lenders and payment processing risk managers between September and October 2022, researchers found an average year-over-year increase of 14.5 percent in SMB lending fraud, up from 6.9 percent the previous year.

Tom Hunt, director of business risk strategy at LexisNexis Risk Solutions, noted the study, conducted by global market research firm KS&R, attempted to identify different types of SMB lending fraud and various approaches to identifying, tracking and combatting these malicious activities.

"The study shows that lenders using a multi-layered anti-fraud approach that integrates anti-fraud measures with digital channel operations can be more effective at detecting and mitigating fraud and its costs early," he said "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."

Fraud prevention recommendations

In addition to layering in advanced fraud protection into all digital channels, Hunt cited the report's following recommendations for preventing SMB lending fraud:

• Assess digital identity attributes: Confirm borrowers are who they say they are and do not rely on manual processes, limited technologies or point solutions to reduce challenge rates, manual reviews and costs.

• Implement multiple layers of fraud protection: Deploy a multi-layered, strong authentication defense approach with a single authentication decision platform that assesses real-time event data; third-party signals; and global, cross-channel intelligence.

• Protect Endpoints: Use technologies that recognize your customers, determine their point of access, and distinguish them from fraudsters and malicious bots to protect vulnerabilities in new account openings, which are the first point of contact for legitimate customers and fraudsters.

SMB lending trends

LexisNexis Risk Solutions researchers advised the overall impact of SMB fraud losses could represent as much as 15 percent of overall losses for the institutions surveyed, with about 19 percent of SMB lending fraud losses stemming from post-pandemic acceleration of digital channels, which in aggregate accept more than half of all SMB loan applications submitted through remote channels.

For this reason, they noted, most lenders that have pivoted to online and mobile transactions must also invest in training, increasing staff and adding fraud detection solutions such as geolocation and behavioral biometrics.

Researchers added that some lenders are launching proactive fraud prevention to curb SMB lending fraud. Given the rising use of email and phone risk verification solutions, the study recommended using advanced transaction verification to protect digital identity, identifying lack of time to train staff, competing budget priorities and price sensitivity as key barriers to implementing advanced, multilayered fraud prevention solutions.

A downloadable copy of the report is available at risk.lexisnexis.com/insights-resources/research/smb-lending-fraud-study

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