LNRS study finds double-digit rise in SMB lending fraud

Small and midsize business (SMB) lending fraud rose significantly over the past year, with most lenders expecting the growth to continue. This is according to the LexisNexis Risk Solutions 2024 Small Business Lending Fraud Study, which highlights evolving challenges in SMB lending fraud and the strategies lenders are employing to combat it.

The study surveyed 135 professionals responsible for risk and fraud assessments or decisions at banks, credit unions, fintech/digital lenders and payment processors.

"Small and medium-sized business lending fraud has increased by a double-digit percentage year over year, with most lenders expecting fraud levels to continue to increase in the coming months," said Tom Hunt, director, business risk strategy at LNRS, a global data and analytics company.

"Our annual study shows that lenders employing a multi-layered solutions approach, integrated with cybersecurity and digital channel operations, experience more positive outcomes when lending to small businesses," Hunt added. "These include reduced fraud losses as a percentage of annual revenue and a slower rate of increase in SMB lending fraud."

The study found that more than 80 percent of respondents reported a nearly 14 percent rise in SMB lending fraud over the last year, despite a growing reluctance among lenders to issue new credit. While SMB lending fraud is still increasing at a consistent rate, it is gradually moving away from the pandemic's influence. Most fraudulent activities are detected within the first month of a new customer relationship.

A shift toward tech-driven prevention

The report identifies stolen business identities and stolen consumer or owner identities as the most common types of SMB lending fraud. These methods make detection particularly challenging for lenders. To address this, organizations are enhancing their detection capabilities and adopting a proactive stance toward fraud prevention.

Seventy percent of organizations are adjusting their strategies to detect and mitigate fraud more effectively. Many lenders have tightened their mobile and online transaction policies, moving from labor-centric to tech-driven fraud prevention methods. The focus is on advanced identity solutions such as behavioral biometrics, geolocation and real-time transaction scoring.

Amid intensified efforts to reduce fraud, organizations face the challenge of minimizing friction for legitimate customers. Around 17 percent of overall losses are attributed to efforts to streamline the approval process, demonstrating the fine line businesses must walk between thorough fraud detection and maintaining a positive customer experience.

"Though the perception exists that SMBs have complex structures, our study reveals that lenders using a multi-layered approach, incorporating both cybersecurity and digital channel operations, are more successful in reducing fraud losses," Hunt said.

Preventing SMB lending fraud

The study outlines four key recommendations for preventing SMB lending fraud:

1. Enhance identity proofing: Implement both verification and authentication processes, particularly in remote channels where fraud risk is higher.
2. Adopt a multi-layered approach: Combine various authentication solutions, such as two-factor authentication, biometrics, and behavioral biometrics, to address different risks across multiple channels.
3. Focus on early-stage fraud detection: Strengthen screening solutions at the account opening stage, including checks for fake or suspicious identification numbers.
4. Share intelligence: Utilize consortiums and digital identity networks to share data and strengthen defenses against cybercriminal networks.

Researchers emphasized that proactive fraud prevention strategies, incorporating advanced technology and shared intelligence, can help reduce fraud losses and improve customer loyalty. And with fraud continuing to pose a significant threat to SMB lending, organizations are increasingly adopting a more comprehensive, tech-driven approach to mitigate risks.

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