LexisNexis Risk Solutions Study Reveals Rising SMB Lending Fraud, Anticipated to Increase Further

LexisNexis Risk Solutions has released its latest Small and Midsize Business (SMB) Lending Fraud Study, highlighting a significant rise in fraud cases impacting small and medium-sized businesses. According to the report, SMB lending fraud has increased by nearly 14% over the past year, with over 80% of surveyed lenders expecting further increases in the coming months. The study attributes much of the fraud to digital channels, as lenders continue to tighten their credit issuance policies in response.

While SMB lending fraud remains prevalent, the influence of the pandemic on fraud rates is diminishing, with most fraudulent activity detected within the first month of a new customer relationship. Organizations now recognize that preventing fraud is crucial not only for reducing losses but also for boosting revenues and improving customer loyalty. As digital channels account for the majority of fraud losses, 70% of lenders have adjusted their strategies to enhance fraud detection and mitigation.

Key Findings on SMB Lending Fraud

• Common Fraud Tactics: The most frequent types of fraud include stolen business identities and stolen consumer/owner identities, making detection particularly challenging. Businesses acknowledge that reducing fraud can positively impact both revenue and customer satisfaction.
• Tech-Driven Fraud Prevention: Organizations are transitioning from manual, labor-intensive fraud detection methods to more advanced, tech-driven solutions. Despite this shift, many companies report that 6-10% of overall losses are still attributable to fraud, with 17% of these losses tied to efforts to reduce friction in customer approval processes.
• Proactive Prevention Efforts: Advanced identity solutions, such as behavioral biometrics, geolocation, and real-time transaction scoring, are increasingly being integrated into anti-fraud efforts. Fintech and digital lenders are leading the charge in adopting these cutting-edge technologies.

Tom Hunt, director of business risk strategy at LexisNexis Risk Solutions, says, “Though the perception exists that SMBs have complex structures, 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. These include reduced fraud losses as a percentage of annual revenue and a slower rate of increase in SMB lending fraud.”

Top Four Recommendations for Preventing SMB Lending Fraud

1. Enhance Identity Proofing: Businesses should focus on both verification and authentication processes, especially in digital channels where the risk of fraud is higher. Technology-driven solutions are critical for identifying sophisticated fraud attempts.
2. Adopt a Multi-Layered Approach: Combining multiple authentication methods, such as two-factor authentication and biometrics, provides better protection. Integrating cybersecurity with fraud prevention enhances overall security.
3. Focus on Early-Stage Detection: Fraud prevention at the account opening stage is key. Enhanced screening processes, including checks for suspicious Social Security Numbers (SSN) and Tax Identification Numbers (TIN), can help stop fraudulent activity early on.
4. Share Intelligence: Leveraging consortiums and digital identity networks allows businesses to share valuable data, creating a peer-based intelligence layer that helps secure digital channels against cybercriminal networks.

The study surveyed 135 professionals from banks, credit unions, fintech/digital lenders, and payment processors, all of whom are responsible for risk and fraud assessments for SMB customers. The study focused on businesses with up to $10 million in annual earnings, exploring trends in SMB lending fraud, the types of fraud experienced, and how institutions are adapting to combat these risks.