ATLANTA– A new study has found lending fraud financially hits smaller banks, credit unions and digital lenders at twice the rate of larger competitors, with fraud monetary losses for smaller banks amounting to 4.5% and 5.8% of overall revenue, compared to 2.9% for larger institutions.
The findings were released by LexisNexis Risk Solutions as part of its 2019 Small and Mid-Sized Business (SMB) Lending Fraud Survey.
“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 Ben Cutler, vice president, business risk and specialty markets, LexisNexis Risk Solutions, in a statement. “While the report uncovered a growing level of fraud across all financial services firms of all sizes over a two-year period, small and mid-sized financial institutions experienced fraud at higher levels.
“Digital lenders in particular are ripe for target by fraudsters since they emphasize speed and application efficiency over fraud prevention,” Cutler continued. “Over the past 24 months digital lenders alone realized a rise in fraud attacks of 8.2%, almost as much as large financial institutions at 8.6%. Given historical and expected fraud rates, it’s no surprise that digital lenders plan to increase investment in antifraud initiatives in 2020.”
Types of Attacks
The company noted that with financial institutions successfully adopting effective methods to fight consumer lending fraud, fraudsters are moving on to small business lending fraud, whether it be through fake identities, synthetic identities, cyberattacks on account creation or identity spoofing for account takeover on existing accounts. Due to the online nature of the business, fraudsters target digital lenders more often than other financial institutions, LexisNexis said.
“Cyberattacks on new small business account creations have grown 35% in the last six months and identity spoofing has grown 20%,” according to the company. “Cybercriminals are creating fraudulent bank accounts or taking over existing accounts, which can be used to take out multiple loans. These risks are greater through the mobile channel, which experienced a 107% growth in account takeover attacks in the last six months.”
Effective Attack Defense
Notably, the study says, organizations that reported being stronger at identifying SMB lending fraud actually are more effective at detecting fraud.
“Not only have these organizations largely prevented fraud increases over the past two years, but they also experienced a lower level of fraud – 3.0% of annual revenues, compared to 5.0% for those organizations that reported only being somewhat effective detecting fraud,” LexisNexis said. “More successful firms tend to be more effective at stopping fraud at account origination or within the first month of the customer relationship using tools like business and consumer fraud analytics and SMB consortium information, to provide a more holistic view of the SMB entity and the individuals behind it.
Methodology
The study surveyed 134 individuals with responsibility for making risk and fraud assessments or decisions for SMB customers and set out to better understand SMB lending fraud, specifically its volume, how it is being identified and tracked, the types of fraud experienced, what’s being done to combat it and if there are differences in SMB lending fraud based on the size or type of organization.