Small and midsize business (SMB) lending fraud has grown significantly over the last two years. COVID-19 and the increased use of mobile applications have fueled this type of fraud — in mid-2020, lenders were already speculating that up to 12% of Paycheck Protection Program loans were fraudulent.
Lenders must offer a streamlined loan application process, compressed lending cycles, and multi-channel loan transactions if they want to keep their customers satisfied and stay competitive in the marketplace. But this also opens the door for fraud.
To protect your financial institution from SMB lending fraud, you need to do the following.
1. Track SMB lending fraud
Track how much SMB lending fraud affects your institution and don’t lump this type of fraud with other types of loan fraud. When you understand how SMB lending fraud affects your organization, you can more effectively determine the resources you should devote to fighting it.
2. Dedicate unique resources to SMB lending fraud
You need a dedicated and unique fraud detection and prevention solution to address this fraud risk. You cannot necessarily rely on general fraud detection tools.
3. Don’t look for fraud in silos
However, while you need to dedicate unique resources to this type of fraud, you also need to ensure that these tools integrate with your other fraud solutions. Tracking fraud in silos across different products or transaction channels increases your risk.
4. Assess both the individual and the business
When committing SMB lending fraud, thieves may use fake or synthetic identities with real businesses or fake identities with fake businesses. You need to assess both the individual and the business.
Take a multi-layered approach that includes ID verification, authentication, consumer and business fraud analytics, and industry knowledge. This will provide the most comprehensive view of the business and the individual applicant.
5. Improve ID verification on online channels
Implement ID verification processes that allow legitimate customers to apply for loans online but also spot criminals. For instance, if you have loan applicants upload a selfie along with their driver’s license, you allow real customers to easily request loans without coming to a branch.
Then, you can use liveliness technology to ensure the selfie is real and not a photo of a photo. The facial recognition software can assess if the ID and selfie match. You may also want to use knowledge-based authentication to add an extra layer of security. This involves asking questions typically gathered from data on credit reports to verify user identity.
6. Cross-reference application data with databases
Criminals can use a blend of real and synthetic elements when applying for an SMB loan. Make sure to run application data through databases that can help you spot inconsistencies and flag synthetic identities.
For instance, this process can help you identify if the applicant’s name and social security number have never been associated with that business, the mailing address on the application, or the account designated to receive the funds.
7. Obtain financial documents directly from banks
Don’t let applicants upload their own financial documents. This leaves room for altercations. Instead, obtain the financial documents directly from their bank. This can be done by allowing the applicant to sign into their bank website from your site.
Most fraud is spotted during the first month. Only some are spotted during loan origination, and a significant amount isn’t detected until the loan is charged off. To avoid revenue drains, you need fraud prevention solutions that can identify SMB lending fraud as soon as possible — preferably during the application process before the funds are distributed.
At SQN Banking Systems, we offer fraud prevention and detection tools and solutions that protect our clients from a wide of fraud. To get help protecting your bank, contact us today.