At ICBA Live, one trend took center stage in conversations about fraud and one thing was clear: fraud isn’t just evolving—it’s coming full circle. While digital fraud continues to rise, community banks are also seeing a resurgence of “old-school” tactics like check washing, document forgery, and insider fraud. It’s a stark reminder that fraudsters don’t retire their best tricks—they reinvent them. These discussions underscored the growing need for vigilance, as fraud continues to escalate across all aspects of banking, including lending.
The statistics 2024 Small Business Lending Fraud Story from LexisNexis paint a clear picture of the current challenge. Small business lending fraud surged by 13.6% in 2023, with fraud-related losses accounting for up to 15% of overall losses for financial institutions according to the ABA Banking Journal. Community banks, trusted for their local focus and customer-first approach, are bearing the brunt of these developments, especially as they process an increasing number of small business and commercial loans via digital and traditional channels.
The Trends Behind Small Business Lending Fraud
Small business lending fraud represents an evolving and growing threat, with both traditional and digital schemes becoming more sophisticated. Here are some of the most concerning trends:
1. The Digital Dilemma
Digital channels have made loan applications more convenient for businesses, but they’ve also created new opportunities for fraudsters. With over half of small and mid-sized business (SMB) loan applications now submitted through online or mobile platforms, fraud tied to digital processes has continued to remain a challenge for community banks. Fraudsters exploit gaps in digital verification systems, taking advantage of automated processes to slip through fake or falsified applications. With modern AI tools, detection at the front line is getting more difficult. In fact fraud detection at the account origination stage has gotten worse, with only 27% of fraud cases detected upfront in 2023, down from 32% the previous year.
2. Synthetic Identity Fraud
One of the most prominent fraud tactics is synthetic identity fraud, where criminals create entirely fake identities using a mix of fabricated and real information. These fake identities are often used to apply for loans, with fraud only detected after the funds have vanished. Again, AI with both image and voice capabilities, have made synthetic fraud more challenging to combat.
3. Document Forgery and Loan Stacking
While not a modern fraud tactic, bankers also commented on how they are seeing more and more attempts of “overloading” the system with applications and with exaggerated financial statements, with the hope of slipping again through the cracks with forgery and loan stacking.
- Document Forgery: Fraudsters submit false business documents, such as doctored financial statements or fake tax returns, to secure loans based on inflated creditworthiness.
- Loan Stacking: This strategy involves submitting multiple applications to different lenders simultaneously, often leading to loan amounts far beyond the borrower’s ability to repay.
With these tactics, fraud has evolved into a systemic issue, demanding a more robust approach from banks.
The Cost of Fraud for Community Banks
For many institutions, the financial impact is staggering. Beyond the direct financial losses—which already represent a significant share of annual revenues for some banks—there’s the broader reputational cost of falling victim to fraud. Community banks rely on trust and their local relationships, making every instance of fraud a potential blow to customer confidence.
One key statistic shared at ICBA Live was that for every dollar lost in fraud, the cost to the bank to recover, remediate, and respond was approximately $4.44. At that point, it would be challenging for any bank to recoup lost revenue from even the most profitable loan.
Proactive Solutions to Mitigate Fraud Risks
Fraud is an evolving challenge, but community banks are not powerless. By adopting a proactive and multifaceted approach, banks can reduce their exposure and better protect themselves. Here are actionable strategies to consider:
1. Enhanced Verification
Adopting cutting-edge verification technologies can strengthen the account origination process. While AI is a tool that the fraudsters are employing, banks can just as effectively respond with AI tools as well. But leveraging options like biometric authentication systems like facial recognition and AI-driven identity verification that identifies anomalies in real-time.
2. Real-Time Monitoring
Fraud prevention tools that analyze transactions and monitor patterns in real-time are key. These systems can detect irregularities, such as unusual transaction sizes or atypical access times, allowing banks to intervene before the fraud escalates.
3. Comprehensive Staff Training
Equip staff with the knowledge and tools to identify red flags in both digital and in-person applications. Regular training sessions focused on fraud schemes can ensure that lending officers, underwriters, and support staff stay alert. The more awareness that you can build up in your teams on the approaches of fraudsters and how to respond will have significant impact on your organization’s ability to address potential risks.
4. Strengthen Collaboration
Fraud is a shared challenge across the financial industry. By fostering partnerships and sharing intelligence with other banks, financial institutions can detect fraudsters attempting repeat offenses across institutions.
5. Regular Audits and Controls
Conducting internal audits and surprise checks on loan documentation can catch issues early. Reviewing loan portfolios to monitor for extraordinary patterns, like excessive concentration with particular brokers or appraisers, is also crucial.
Moving Forward Together
The rise in fraud in small business and commercial lending is a wake-up call for community banks. At ICBA Live, the conversations on this topic reflected both the challenges and the importance of a united front against evolving fraud tactics. By adopting a proactive approach, investing in the right technologies, and fostering a culture of vigilance, community banks can strengthen their defenses against fraud without sacrificing the personal touch that makes them unique.
