Banks and Fintech face daily risks from lending fraud. They must have solutions in place to combat fraudulent applications, manipulated statements, and fake identities. The world is leaning more and more into the virtual world and all forms of digital transactions now are commonplace. Online financial institutions and digital lenders have an added threat to contend with while doing business in cyberspace due to the lack of in-person business interactions.
How Lending Fraud Works
Lending fraud displays itself as many different types of fraud. Mortgage fraud that affects homeownership hopefuls, small business loans fraud that promises business owners opportunities for investment, startup capital, business loan coverage, emergency and expansion funds. Loan fraud affects regular consumers through digital loan offers that promise hassle-free loans with low-interest rates seemingly approved by legit banks and financial institutions. Loan fraud affects the finance industry through fraudulent loan submissions using synthetic or stolen identities.
Even college students aren’t immune to loan fraud. They are the most targeted group next to the finance industry and lured in with promised unsecured loans that will pay off student loans at lower interest rates. Some types of loans are sometimes fronts for identity theft and viruses. Others like pawns and car title loans hold assets as collateral which are promptly seized if you do not pay within a short period of time. All these loan fraud scams can carry obscene interest rates with the promise of no background checks or low payments. Loan scams that falsify identity and mimic banks cause the most damage as they steal from both the banks and their customers.
The Price the Finance Industry Pays
When basic customer due diligence fails because of identity theft, banks can end up onboarding the wrong customer. Banks and Financial institutions have strict Anti-Money Laundering (AML) policies that require enhanced due diligence to achieve Know Your Customer (KYC) or Know Your Business (KYB) compliance. However, when KYC or KYB compliance fails due to identity theft, banks become just as susceptible to loan fraud as everyone else.
These fraudsters can then flood the banks with loan requests that are approved under their false identities but are never paid. Despite intensive KYC compliance campaigns, the use of stolen identities and fictional financial data to commit banking and financial fraud has become very easy due to reduced face-to-face interactions.
Fraudsters can manipulate digital bank statements and other financial documents to fool banks with fake applications. Digitally available bank documents and forms can be manipulated and used to harvest client information and scam bank customers out of their money.
Lending fraud has cost US and Canadian firms in the financial industry upwards of 10 million dollars in 2019. Institution’s risk management executives have identified three key factors that hamper their fight against lending fraud.
- The Ongoing Covid 19 Pandemic
- The rise in identity fraud
- Balancing fraud protection and customer friction
Customers want fraud protection, but don’t want to provide any more personal information than necessary. And Knowledge-Based Authentication (KBA) information can be harvested via online games, forms, and social media profiles. Being stuck in lockdowns and/or forced curfews during the pandemic further reduced face-to-face interactions. These factors assisted in the compilation of synthetic identities and eased the way for a rise in identity fraud.
When lending fraud occurs, there is a cost to the lender. Traditional lenders incur a cost of $ 2.83 per dollar of fraud. For large digital lenders, this cost increases to over $ 3.00 per dollar of fraud. Digital and online lenders also face a five percent higher incidence of attempted fraud than lenders with little to no digital presence. In any event, fraud prevention must be an integral part of any credit risk management plan. The introduction of consumer access to financial data for digital verification services provides another anti-fraud tool with the added benefit of a better experience for the borrower.
How Digital Identity Verification can Reduce Lending Fraud Risk
While lenders can’t stop or control fraud, they can perform due diligence to mitigate those risks. Digital identity verification is already part of basic customer due diligence for KYC/KYB compliance and anti-money laundering practices. For a fraudster to be successful, they would have to either circumvent the digital identity verification system completely (highly not likely) or provide false information.
This means with the right digital identity management system in place, banks will have an opportunity to identify the fraudster as they attempt to scam the system. With permission from customers, banks can access their financial data, and information can be validated and verified immediately. Access to customer transaction data provides the means to verify or validate assets, income, and employment. During the digital verification process, several aspects of the applicant’s identity are questioned. A fraudster would need access to personally identifiable information to successfully complete digital identity verification, and even then, all of the other information they are trying to provide is unlikely to match what is being obtained directly from the financial institutions.
Comparing bank-sourced data is one way to reduce lending fraud risk. Additionally, other customer sources can be used to provide an added layer of security for lenders and borrowers. Using bank transaction data as the base, customer income streams, expenses and utility payments can be used to validate digital identity. For example, employment information and identity can be verified via employment records.
Instant Mobile Identity Verification
As of 2021, there are an estimated 6.4 billion cell phone users and with a projected average increase of 5.3% per year, that figure is set to rise to 7.5 billion in the next five years. Many cell phones come with built-in biometric scans yet access to mobile banking is still based on knowledge-based authentication. Offering customers mobile identity verification solutions can be the fastest way to validate ID during transactions or customer onboarding. Using mobile identity verification can be an automated ID validation system that assists in automated KYC and AML compliance.
Automated KYC for Quick and Safe Customer Onboarding
As part of your customer onboarding strategy, automated KYC can help reduce friction and create seamless flows during your customer onboarding process. Creating a simple KYC verification solution makes achieving AML compliance easier.
User Behavior Monitoring to Avoid Account Takeovers
Automated KYC and AML compliance can do much for customer identity verification. But sometimes the greatest danger to your customers is your own employees. Banks and other financial institutions should implement a user behavior monitoring system to prevent account takeovers. User behavior monitoring can be done on employees’ social media activity before during the hiring process, onboarding, and long after to protect business reputation and reduce onboarding bad actors. User behavior monitoring also works well with long-term customers as banks will have a deeper understanding of habits and spending trends.
Assessing Risk Before, During, and After Customer Onboarding
Sudden changes in a customer’s financial activity can affect their risk score. Too much of a negative increase due to the accumulation of loans or spending more should be an automatic red flag. Checking on your customers to ensure their risk score stays positive and/stable increases customer loyalty and can identify scammers that are in the system. Too much of a positive increase without traceable sources can also be a warning to your digital identity verification system that there is a disturbance in the force.
Digital Identity Verification Using IDMdevice
Mobile phones aren’t the only smart devices you can use for mobile identity verification. Laptops and tablets can be used for automated ID verification through live video and device fingerprinting. Almost all smart devices come with built-in camera systems that can be utilized for digital identity verification. Through IDMdevice device fingerprinting, fraudsters can be identified despite their attempts to hide behind false accounts, bots, and proxy servers.
Adding Spam Checklists to Your ID Validation Systems
Within the global finance industry, there are already watchlists, security institutions, and local and international regulations in place to flag high-risk customers, AML and KYC non-compliant institutions, and sanctioned countries and businesses. In this digital age where financial institutions are trying their best to deter scammers from entering their systems and wreaking havoc with customer information, they missed the threat of spammers. Sending in multiple loan applications to flood your system is a form of spam. Therefore, checking for violators of the Deceptive Mail Prevention and Enforcement Act (DMPEA), CAN-SPAM, GDPR, and other spam checklists should be part of the bank’s ID validation systems for their customer onboarding strategy.
Adding more digital verification procedures into your customer onboarding process doesn’t have to drastically alter your customer onboarding strategy or your customer identity verification process. Many of these digital identity Verification service are automated and in the backend of established ID validation systems and thus will not slow down the onboarding process but increase transaction monitoring and screening efficiency.
Currently, well-developed automated KYC and AML compliance solutions work well to combat synthetic identity fraud with enhanced due diligence keeping high-risk customers at bay. Eliminating fraudsters’ abilities to use manipulated documents online and fake identities is a strong step in digital identity verification.
IDMerit has a multi-layer approach to digital identity verification. We work to provide not one but many layers of protection during customer onboarding and transaction screening and monitoring. On our IDMKyX platform, we cover ID validation, fraud detection, risk management, watchlist screening, behavior monitoring, and device analysis verifying and validating digital identity in as many ways as possible. One thing fraudsters will always do is take advantage of the economic climate and customers’ vulnerabilities.
To that end, IDMerit’s digital identity services should be the key component in your customer onboarding strategy and to reduce lending fraud. No matter the lending method, mitigating fraud risks helps business costs. Applying IDMerit’s digital identity verification solution in conjunction with regulatory practices will ensure the best defenses against identity theft and lending fraud.