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Strategies to Combat Digital Lending Fraud in 2021

How much has lending fraud cost you in the past fiscal year? According to a study by the Association of Certified Fraud Examiners, 90% of executive fraud examiners surveyed anticipate an increase in the overall level of fraud by the end of 2021 compared to last year, with 44% saying this change will likely be significant. Fraud has been a persistent and lasting roadblock in lending that has left many financial institutions to lose significant revenue. In fact, financial institutions are 300 times more likely to suffer from cyber-attacks than organizations from other sectors. Accompanying rising digital acceleration trends of COVID-19, financial institutions have been more vulnerable to identity-based threats. With criminals becoming more sophisticated in their approaches, implementing a strategy to fight the risks of modern banking is essential. Here’s what you need to know to prepare for continuing trends and new developments in fraud in 2021:


Factors Conducive to Fraud During COVID-19

The lending space is becoming increasingly more competitive, as fintechs and nontraditional players enter the market with new and innovative ways of detecting fraud. In fact, a recent EY survey shows 84% of banks are considering new fintech partnerships to improve customer experience and accelerate digital transformation. The big question now, of course, is how to evaluate potential threats that could hinder your success.

Anovaa’s General Counsel & Director of Compliance, Mike Decktor suggests that there are three conditions that must coexist with respect to a potential fraudster in order for him or her to actually perpetrate a scheme: (a) the pressure to obtain resources, (b) the opportunity to infiltrate a system and (c) the ability to rationalize contemplated actions. Known as the “fraud triangle,” fraudsters have leveraged COVID-19 as an excuse to engage in bad behavior in a time of need.

Not surprisingly, at Anovaa, we have predominantly seen an increase in fraudulent reporting of income underlying the loan origination process, as well as other instances of personal information that fraudsters anticipate financial institutions may not have the ability to verify prior to getting too far down the process. These types of actions include leveraging fake identities, synthetic identities, cyberattacks on account creation or identity spoofing for account takeovers. At Anovaa, we take a comprehensive approach of fraud defense to quickly identify sources. In replacement of traditional fraud prevention policies and programs, we empower financial institutions with more cutting-edge fraud prevention techniques that utilize behavioral analysis technologies. In order for your financial institution to minimize risk, it is critical to take a proactive approach in implementing real-time technology and reporting to get ahead of these threats instead of dealing with it on the back end.


Framework for Investigating, Managing and Preventing Lending Fraud

When leveraging multiple data sources for fraud, what should your financial institution consider to maintain an optimal loan experience? According, to Anovaa’s Head of Delivery, Ryan West, “It is crucial to find the right balance between investigating fraud and introducing friction.” Implementing a “friction correct” strategy requires two core capabilities: a) the ability to leverage multiple data sources in real-time and b) the ability to dynamically deliver a fraud model based on that real-time information.

In an era driven by seamless digital experiences, forward-thinking institutions have turned to fintechs for efficient and cost-saving lending fraud capabilities. The financial institutions that fall short in investigating lending fraud have continued to rely on legacy systems plagued with slow, manual and friction-filled interactions. In contrast, a flexible and efficient loan origination framework reimagines fraud investigation, meticulously tracking and analyzing member experience, while automating red flags to lenders in real-time.

Financial institutions with exquisite fraud prevention can detect fraud before it becomes a greater issue. For instance, technologies including AI and ML carry a multitude of advantages in fraud prevention abilities. A study found that 36% of banks that use AI reported improvements in their anti-money laundering (AML) capabilities, and 55% said their false positive rates for legitimate customer transactions went down with AI integration.

Ultimately, innovation is critical in lending. Fraud control is not one event or circumstance, but a dynamic process that requires constant review and modifications.