How to Detect Loan Fraud and Protect Your Company;

As a risk executive or fraud leader in a digital lending company, your biggest priority is implementing effective loan fraud prevention measures. Failure to do so can lead to revenue losses. And when these losses become consistent, your job might become more worrying than fulfilling.

However, there are strategies and tools to make your job easier.

Throughout this article, you’ll see how SEON effectively helps leaders like you fight loan fraud. For instance, Jesús Leon, a Credit Analyst at Atrato: 

Jesus Leon Credit Analyst at Atrato

[SEON’s review on G2]

What Are the Growing Types of Loan Fraud?

We understand you’re familiar with the different types of loan fraud, but let’s have another look at those on the rise.

1. First-Party Fraud (or Personal Loan Fraud)

Here, fraudsters intentionally provide false information or exaggerate their financial status to get credit they might not ordinarily qualify for. These illegal attempts make most digital lenders misconstrue first-party fraud as a credit loss. 

With this fraudulent act on the rise, you’ll have difficulty determining how much you actually lose to fraud versus credit risk. 

Unfortunately, loan companies won’t have it easier anytime soon. In the first half of 2021 alone, personal loan fraud rose by 40%, up 63% from the previous year. 

2. Second-Party Loan Fraud 

Second-party fraud occurs whenever an individual gives their personal information to another person to commit fraud. The accomplice can be a family member or friend. 

Sometimes, they might not even be aware of the borrowing scheme.

It’s hard to spot second-party loan fraud as there’s often no sign of illegality. After all, the information provided is legitimate. You’ll see how to limit this growing attack below.

3. Third-Party Loan Fraud 

Otherwise known as identity theft, third-party loan fraud is when an individual uses another person’s identity (without their consent) or a fake identity to gain credit with no intention of payback. 

This is mainly supported by synthetic identities, in which the fraudster creates a new identity by combining stolen and fake information. After that, they legitimize it and inflate their credit scores by borrowing small amounts and paying off the debt. This allows them to borrow large sums and proceed to vanish without a trace. 

Third-party loan fraud can also happen offline. 

A real-life example of this happened in Nigeria, where fraudsters stole a certain Emmanuel Odoemelam’s phone and used his SIM card to access a loan. In his words: 

“My phone got stolen, and later that evening, around 7 pm, N50,000 (~$100) was moved into my bank account. The thief started withdrawing the money gradually.”

The frictionless, fully-online onboarding process associated with digital lending makes third-party fraud a breeze and, done at a scale, leads to huge losses. According to McKinsey, synthetic identities cause 10% to 15% of lender losses annually. 

4. Loan Stacking 

Loan stacking happens when the same borrower applies for several loans in a short period with no intention of repayment. 

Given how new accounts and credit inquiries can take up to 30 days to display in a credit profile, most lenders can’t identify who applied for multiple loans within a short time frame until it’s too late. Fraudsters recognize the lucrativeness of this loophole and exploit it to their advantage. 

These fraud risks can cripple your lending company if you don’t implement a real-time fraud detection and prevention solution like SEON. Doing this would give you peace of mind, knowing fraudsters are always in check. 

Take Guillermo, a Credit Analyst and SEON customer, for instance: 

Guillermo B Credit Analyst

When you try out SEON, you can spot fake loan requests in their tracks. 

Reduce fraud rates on average by 70-80%

Fight loan fraud efficiently

Book a Demo

But to make the best use of SEON, you first need to deeply understand the loopholes causing loan fraud… 

What Causes Loan Fraud? 

Although many risk experts have tried to combat the above fraud risks, these persist for the reasons below. 

1. The Need to Maintain Seamless Borrower Experience

Convenience is the bread and butter of digital lending.

This explains why you and your fellow digital lenders keep KYC checks as simple as possible. And while this favors borrowers, it introduces a greater risk of fraud as fraudsters can steal data through biometrics hacking, deepfakes, and massive data breaches with little or no resistance. 

2. Synthetic ID Theft Keeps Growing 

Pairing stolen ID documents and fictitious information is how fraudsters bypass KYC checks when applying for a loan. Given the pressure on lenders to maintain a seamless borrower experience and stolen info often belonging to real persons, there’s no end in sight for synthetic ID fraud. On top of this, fraudsters are getting smarter about synthetic IDs. 

The Federal Reserve shares the same view. According to them, synthetic ID fraud is the fastest-growing fraud in the US, with up to 95% of synthetic IDs unflagged by fraud prevention. 

3. Application Fraud Attempts Are Becoming More Overwhelming 

Criminals are increasingly relying on decentralized bots to complete fraudulent loan applications. These bots help them fill out loan applications in large volumes that easily overwhelm lenders whose processes still have some manual elements. 

4. Credit Data Simply Isn’t Available 

Most loan companies lack adequate data to conduct accurate risk profiling. Interestingly, this scarcity is not their fault. 

First, some loan companies focus on developing countries with a high unbanked population and no credit bureau. As a result, they don’t really know most of their borrowers’ credit history and, importantly, are having a hard time assessing their trustworthiness.

For loan companies in more developed countries, the problem is thin-file – people with little or no credit history. In the US, for instance, there are over 45 million people with little or no credit history. And so, vetting is often complex as there is no credit report to support applicants’ claims. 

Savvy fraudsters see these loopholes as an opportunity to milk digital lending, especially since online loan decisions are expected to be swift. 

How Do You Prevent Loan Fraud Risks?

In addition to efficient underwriting practices, loan fraud risk can be minimized by creating an accurate profile of each applicant that stems from both their device configuration and the information they offer us about themselves, including their IP, email address and phone number.

1. Move Beyond Basic Identity Verification to Digital Footprint Analysis 

As noted in Javelin’s Study on Digital Lending Fraud:

“Relying on the simple validation of core PII elements to simultaneously comply with Customer Identification Program (CIP) requirements and manage fraud risk is no longer adequate to thwart fraudsters.”

Basic identity verification is no longer effective. For this and other reasons, you need an identity proofing system that cannot be gamed. 

And that is? Digital footprint analysis, otherwise known as digital footprinting. 

Digital footprinting involves verifying a person’s online presence (that is, their digital footprint) to get an idea of who they are. It’s rooted in the belief that phone and email addresses are the new digital passport. 

So unlike the typical personal information details submitted in loan applications, you cannot fake or falsify a digital footprint. 

Even more, it is deliverable in real-time and at scale, making credit scoring checks possible even in markets with a high unbanked population. For example, FairMoney, a neobank serving Nigeria – a country with a vast unbanked population – overlayed SEON’s digital and social lookup with device fingerprinting to filter out fraudsters by assessing their digital presence. 

But what do social lookup and device fingerprinting entail? 

These two features are part of SEON – a product you can leverage to secure digital footprint data points. 

Both help you enrich borrowers’ KYC info via well-designed modules, namely:

Device Fingerprinting

Part of the Fraud API, this module examines available data on the borrowers’ devices used to access your lending site, allowing you to:

  • flag suspicious devices like emulators and VPNs
  • connect users who are using shared devices, which can be tied to fraudulent practices

This function is enabled by the generation of specific hashes via any of these parameters:

Device Fingerprinting

Email Analysis

Through deep social media profiling and domain verification, this module helps you confirm the legitimacy of an email address by looking up 35+ digital and social sites to find profiles connected to the email. It also reveals if the email address has been involved in blacklists and data breaches. 

You can look up an email manually, or integrate the Email API into your risk tech stack: 

Email Analysis

[SEON analyzes whether the address has been used on 35+ social sites such as Facebook, Twitter, Booking.com, Airbnb, and more, and gleans information from there to determine a risk scoring]

You can also check multiple email addresses at once:

Check Multiple Email Addresses

[With these risk scores, you should be more concerned about the second user]

Phone analysis

This module confirms whether the submitted phone number is real and if it’s used for messaging purposes or has messaging and social profiles connected to it. 

Phone Analysis

[With a risk score of 0, it’s safe to say this user’s phone number is real]

IP Analysis

You can use this module to know the origin of the customer’s connection to your site, their location, and whether it is masked with Tor, a proxy or a VPN:

IP Analysis

[It’s safe to say this user actually lives in London and that the location is not a proxy]

The data points revealed by these modules might seem insignificant to your credit scoring decision at first glance, but when you connect the dots, you’ll realize they’re a powerful predictor of fraud risks:

Fraud Risks

An Asian microlending company proved this. 

Using the email and phone modules to look into their users, SEON helped them discover that 75% of defaulting customers had no social media presence. Consequently, they became more careful whenever they encountered loan applicants with no social media presence. 

Overall, digital footprinting will help you:

  • Learn more about borrowers based on their online presence
  • build more precise risk profiles based on single data points 
  • enable dynamic, lightweight KYC without sacrificing security

2. Take Notes of Regulatory Complications That Could Arise With Fraud Prevention Solutions 

You might want to consider other fraud prevention options. But while doing so, don’t neglect compliance. Always confirm if using a solution will expose your company to non-compliance risks. 

At SEON, we are ISO 27001-certified in addition to meeting GDPR and SCA requirements. So you have nothing to worry about when you use our products to fight fraud.

SEON ISO 27001 Certification

Deal With Loan Fraud Risks Effectively

Loan fraud is fast eating deep into many digital lenders’ bottom lines.

For this reason, improving your company’s fraud prevention processes is a must. 

Layering your processes with SEON makes that improvement easier to achieve. 

Through digital fingerprinting, which provides risk scores with adjustable thresholds, SEON helps you filter out junk users easily. It also keeps your KYC light, allowing you to fight fraud without sacrificing frictionless customer experiences. 

This is what compels risk executives like Aleksei, Head of Credit Risk at TF Bank AB, to rave about SEON:

Aleksei Head of Credit Risk at TF Bank AB

[SEON’s review on G2]

Wanna improve your credit risk scoring models as well? 

Reduce fraud rates on average by 70-80%

Partner with SEON to reduce fraud rates in your business with real time data enrichment and advanced APIs

Book a Demo

Sources

  • Javelin: Digital Lending Fraud
  • GDS Link: How Banks & Credit Unions Need to Treat Fraud Management in 2022
  • Credit Connect: Bank account and loan fraud soars in pandemic
  • Banking Exchange: COVID-19 and Synthetic Identity Fraud: The Importance of Lenders Mitigating Risks
  • BusinessWire: Federal Reserve Releases Synthetic Identity Fraud Mitigation Toolkit to Educate, Fight Fraud

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Author avatar
Jimmy Fong
CCO

Jimmy is the CCO of SEON and brings his in-depth experience of fraud-fighting to assist fraud teams everywhere.


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