Private credit can be an important source of investment, but for the system to work for all parties—both lenders and borrowers—the chain cannot be broken.
However, fraud in small and medium-sized enterprise (SME) loans has increased by double digits year over year, with most lenders expecting fraud levels to continue rising in the coming months, according to the LexisNexis Risk Solutions SME Loan Fraud Study.
More than 80% of respondents reported that fraud in SME loans increased by nearly 14% over the past year, despite lenders being less willing to issue new credit.
While SME loan fraud is steadily increasing, it is gradually moving away from the influence of the pandemic. In particular, fraud is often detected within the first month of establishing a relationship with a new client.
The majority of fraud losses are attributed to digital channels, prompting 70% of organizations to adjust their strategies to detect and mitigate fraud.
“This shift highlights a proactive approach within the sector, with many lenders tightening their mobile and online transaction policies. While smaller banks and credit unions are balancing their policies, larger institutions are taking stricter measures,” the report states.
Regarding the main methods used by defaulters, the theft of a company’s legitimate identity and the theft of consumer/owner identity have emerged as the most common forms of SME loan fraud, making detection particularly challenging.
The study offers several recommendations to prevent SME loan fraud, such as improving identity verification controls and utilizing advanced fraud detection systems that go beyond manual methods.
Additionally, it advocates for a multi-layered approach by combining different solutions to address the unique risks posed by various channels, payment methods, and products. This approach should integrate cybersecurity with fraud prevention efforts and employ advanced solutions like OTP/two-factor authentication, biometrics, and behavioral biometrics.
Finally, lenders should focus on early fraud detection and intelligence sharing. Businesses should harness the power of collective intelligence through consortia and digital identity networks. By participating in a consortium, companies can share valuable data, creating a peer-to-peer intelligence layer that allows them to gain greater context, protect their digital channels from cybercriminal networks, and make smarter, real-time risk decisions.
