Lenders face higher costs of fraud than other industries, including retail, e-commerce and financial services. For every dollar of fraud, lending companies incur $2.82 in costs, which includes fees, interest, etc., according to LexisNexis Risk Solutions. Large digital lenders, with over $50 million in annual revenue, are hit hardest by fraud in this space.
Growing risks of fraud
Based on a comprehensive survey of 168 risk and fraud executives at lending institutions, including auto lenders, finance companies, mortgage companies, non-bank credit card issuers and non-bank personal loan issuers, the study evaluates how to navigate the growing risks of fraud, while strengthening customer trust and loyalty.
The study shows how lenders with a majority of digital transactions are more at risk than those without, with 34 percent of fraudulent transactions per month, as opposed to 29 percent fraudulent transactions for non-digital lenders.
The cost of fraud is considerably higher for large digital lenders, who pay $3.07 for every dollar of fraud, in contrast with the cost to small and midsized digital lenders at $2.63 per dollar, and those lenders with no digital practice, who pay $2.83 per dollar of fraud.
Large digital lenders also face a higher risk of successful fraud attempts than others within the lending space; of the 1,959 transactions per month, 26 percent of these fraud attempts are successful. However, small and midsized digital lenders also face a significant challenge, with 413 fraudulent attempts and a 31 percent success rate.
“Consumer demand for digital lending is increasing, but it brings with it new fraud risks,” says Lucien De Voux, director, digital economy strategy, LexisNexis Risk Solutions. “Identifying the person behind the screen is much harder to do than in person. Lenders operating through digital channels need to adopt a multi-layered approach to prevent identity and transaction fraud.”
Other key findings
- Overall, the average monthly volume of successful and prevented fraud transactions among credit lenders is nearly double that of mortgage lenders, though the percentage of prevented versus successful fraud transactions between the two industries is similar.
- 49 percent of risk and fraud executives at large digital lenders think that identity verification is one of their top 3 biggest mobile fraud challenges, while only 25 percent of small and midsized digital lenders feel the same. Small/midsized digital lenders are more challenged with address, e-mail or device verification resulting from less investment in risk mitigation solutions which can support these issues.
- 25 percent of fraud faced by lending companies is synthetic identity fraud, where a fraudster creates a “fake” account based on a hodge-podge of consumers’ Personally Identifiable Information (PII).
- Larger digital lenders are more likely to represent “best-in-class” thinking about the adoption of fraud mitigation solutions, as they face more significant attacks.
Paul Bjerke, vice president, fraud and identity management, LexisNexis Risk Solutions, adds, “Online lending has become a focus for fraudsters, with digital channels targeted more so than others. Monitoring for fraud across different channels and adopting a multi-layer fraud prevention strategy is imperative to drive down the cost of fraud for lenders.”