Fraud is on the rise across the board. But nowhere is it, perhaps, more prevalent right now than in business lending.
The problem became increasingly evident during the Covid-19 pandemic when the UK government lost £4.9 billion to loan fraud. And it shows no signs of abating any time soon.
Business lending fraud manifests itself in four main areas. They are application fraud, impersonating another business, providing incorrect information and hiding data.
Types of lending fraud
Application fraud entails a business or individual using false information or counterfeit documents in their application for a financial product, such as a loan. That may include the use of fake account statements to suggest that they earn more than they really do.
Fraudsters also use impersonation to try and trick a lender into believing they are someone else so that they can secure a loan or get a larger amount. Stolen identities include names and addresses, and other details.
In addition to pretending to be someone they aren’t, criminals intentionally provide the wrong information too. This includes the supply of misstated management records and fudged bank statements, to make them appear real.
Hiding data is also rife. This involves withholding often vital information from the lender so that they can’t make an accurate lending decision and are therefore likely to unwittingly award them a favourable outcome.
Uphill task
All of these fraud types can be perpetrated by a person or a company. Given the increasingly sophisticated and complex methods employed by fraudsters, they are becoming extremely difficult to detect.
All too often, the victim doesn’t realise they have been targeted until their credit application loan is turned down because of fraudulent activity that has been picked up on their account. By then, many times, their credentials or money has been stolen and it’s too late to do anything about it.
As lenders continue to expand their customer base globally and demand for loans rises, their resources are becoming increasingly more stretched. Having to process thousands of loan and mortgage applications manually, they have, inevitably, been targeted by criminals trying to fly under the radar.
The role of AI
Human intervention only goes so far when it comes to tackling the problem of business lending fraud. To clamp down on the problem, lenders need to harness the power of technology, specifically artificial intelligence (AI).
AI’s capabilities have already been well-documented in the banking and finance sector. It has not only helped to speed up and make transactional processes more accurate and efficient but now it’s being used in the fight against fraud to address problems such as money laundering and credit card fraud.
The same technology can be applied to lending. AI’s algorithms enable it to quickly sift through huge amounts of data in an application, checking for signs of fraudulent or suspicious activity.
This way, it can detect factors such as multiple applications for the same loan from the same person or IP address, as well as if someone is impersonating another business or is using incorrect information. The more advanced the technology becomes, the more efficient and quicker it is at uncovering these issues.
It’s particularly useful in spotting potential borrowers that may be likely to default on their loans or picking up signs of fraud or delinquency within existing loans. But AI’s findings always need to be double-checked by a human in case an error has crept in or there has been an oversight.
Lenders can also use analytics technology to score each new online application for fraud risk as well as credit risk. Additionally, network graphing and link analysis can indicate links to other entities that indicate fraud risk, while also revealing patterns of behaviour and anomalies that indicate fraud risk.
AI’s challenges
There’s no doubting AI’s capabilities. But it comes with its challenges too.
Most notably, the risk of AI bias or discrimination creeping in when it’s programmed for machine learning. If allowed to manifest itself, this can cause big problems further down the line where it fails to detect or overlooks fraud.
If it falls into the wrong hands, it can be a problem too. The scammers are now turning AI to their advantage by using it to try and avoid detection.
Provided the lender’s defences and protection are up to date and working well, though, they should be able to mitigate it. That requires regular investment and testing of their technology.
AI is certainly the way everyone is going at the moment. That’s evidenced by the fact that more than 50% of financial institutions plan to implement AI solutions to detect unknown fraud cases.
As fraudsters become increasingly bolder and more opportunistic, so bank lending fraud will continue to be a problem. But it needn’t be if AI is used effectively to deal with the issue.
Chirag Shah, founder and CEO of Nucleus Commerical Finance and Pulse has over 20 years of experience in the financial services industry and a deep understanding of the needs of UK SMEs.
In 2011, he founded Nucleus, a leading alternative finance provider, to offer flexible and tailored solutions for SMEs across various sectors and stages of growth. With an understanding of the challenges that UK SMEs face in the current economic climate, Chirag launched Pulse in October 2022, a free-to-use service that helps businesses and accountants gain insights into financial performance with AI-powered data visualisation and personalised dashboards. Chirag is not only committed to driving growth and innovation in the UK business ecosystem, but he’s also helping SMEs better understand their data to boost their profitability and guide them towards success.
