BID® Daily Newsletter
Oct 31, 2024

BID® Daily Newsletter

Oct 31, 2024

A Closer Look at SMB Loan Fraud

Summary: SMB lending fraud is on the rise. We discuss recent survey results on trends and provide steps CFIs can take to help keep this type of fraud in check.

The phrase “Will work for food,” long associated with homeless people seeking food or monetary donations, has taken on an entirely different meaning. Pets in China are taking part-time jobs at dog and cat cafes, where their owners are being paid with pet food and discounts at the cafes where they are employed. The trend, known in China as Zhengmaotiaoqian, literally means “earn snack money” and is attractive to pet owners both because of the money saved on pet food and the fact that it eliminates the need to pay caretakers when they are away from home. With the rising trend of owning pets leading to an explosion in the number of pet cafes (China established 4k in 2023), the number of these small businesses is only expected to grow.
Unfortunately, an unpopular trend that’s also on the rise is small business lending fraud.
Lending fraud among small- and medium-sized businesses (SMBs) was up an average of 13.6% YoY in 2023, according to the results of the 2024 Small Business Lending Fraud study. In fact, 56% of SMBs attribute anywhere from 6% to 10% of their overall losses to small business lending fraud. They also don’t expect the problem to end anytime soon, with 64% of SMBs predicting that the amount of loan fraud will continue rising over the coming 12 months. Not surprisingly, digital channels are a major source of fraud, with lenders that rely primarily on them experiencing a substantial increase.
Identifying weaknesses in fraud detection is a key component of prevention. For community financial institutions (CFIs), 69% indicated that they are best at recognizing compromised personal identities; followed by compromised legitimate business identities (62%); synthetic people as business owners (59%); highly organized criminal enterprises (49%); synthetic businesses (51%); and bogus businesses (10%). While stolen legitimate business identities and stolen consumer identities remain a major problem for financial institutions, CFIs actually saw a decrease in this area in 2023, with respondents indicating that this is a problem 56% of the time, down from 65% in 2022. Yet, that doesn’t mean that recognizing such fraud has gotten easier.
As fraudsters become ever-more sophisticated in their tactics, CFIs find that identifying stolen legitimate business identities and stolen consumer identifies is their biggest challenge (79%); followed by legitimate business and owner identities (64%); bogus businesses and fake consumers (59%); bogus businesses and stolen consumer identities (54%); and legitimate businesses and fake consumer identities (41%).
Detecting and Preventing Loan Fraud
One of the biggest reasons attributed to the ongoing rise in SMB fraud is the complicated structure of many of these businesses, coupled with the larger payoff criminals can get from them versus targeting individuals. Given the ongoing levels of small business fraud and expectations that it will continue to rise, CFIs should be intentional in their efforts to detect and prevent it. 
Following are a few suggestions for ways to do just that:
  • Advanced tech. Adoption of more sophisticated identity technologies such as geolocation, behavioral biometrics and real-time transactions can help curtail SMB fraud. 
  • Layers of security. A multi-layered approach to digital channel oversight and cybersecurity can deter criminals who are likely to move on to competitors where it is easier to surpass security measures.  
  • Physical and digital identity verification. Authenticating identities should include assessments of both physical and digital identity characteristics through methods such as behavioral biometrics and device assessment. 
  • Early detection focus. Early-stage detection of fraud is critical and CFIs should focus their efforts on identifying fraud at the initial logon of a device or at the beginning stage of a new account opening. 
SMB fraud is on the rise, but CFIs have been doing a better job of keeping it in check than their bulge bracket counterparts. To continue holding their ground against SMB lending fraud, CFIs need to remain vigilant in their efforts to manage fraud and should implement a multi-tiered approach to security. 
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