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Fraud in Unsecured Personal Lending

Jun 17, 2016 Allen Taylor

Fraud in Unsecured Personal Lending

The Economist Intelligence Unit (EIU), at the behest of global intelligence and information management firm Kroll, have conducted a survey of senior executives serving in a wide variety of industries from around the world for eight years running and have discovered that fraud is an ever-increasing threat to businesses of all types, including those involved in personal lending, operating in the digital realm. In fact, in the past year, fraud has increased by 14% from three years ago. Ironically, the same report in 2013 revealed that corporate fraud spiked that year.

Of course, there are different types of fraud, but all of them are harmful. The top three most prevalent types of fraud are theft of physical assets; vendor, supplier, or procurement fraud; and identity theft.

While U.S. companies are just as subject to fraud as companies from other countries, evidence shows that U.S. firms are not any more at risk than companies in other regions. In fact, the survey shows that the highest prevalence of fraud among companies occurred in Sub-Saharan Africa (84% of the companies surveyed) and the fewest occurred in The Gulf States (63% of those surveyed). The United States was closer to China and Russia, both of which reported 73% fraud experience compared to 75% in the U.S. The one common denominator that increases the risk of fraud among companies worldwide is the increase in globalization, however, different regions may experience different types of fraud in varying degrees.

The EIU report doesn’t specifically address fraud as it impacts unsecured personal lending, but it does address certain types of fraud that lenders should be aware of. One of those is bankruptcy fraud. The report also provides a report card on the financial services industry where fraud is concerned.

Implications of Fraud for Unsecured Personal Lending

In 2012, the U.S. Immigration and Customs Enforcement (ICE) agency charged 32 defendants with 62 counts of loan fraud. The accused allegedly set up websites for fictional companies and took unsecured personal loan applications from unsuspecting consumers, charging them a security deposit for the loans they were supposedly approved for. The scheme impacted 2,000 victims worth more than $2.7 million.

On the surface, this type of fraud may appear to hurt only consumers. However, given that it directly impacts consumer trust in legitimate lending companies, it’s harmful to the entire industry.

That’s an example of the most prevalent type of unsecured personal lending fraud—theft of physical assets. Consumers are defrauded of their hard-earned money by fraudsters who have no intention of honoring the loans they purportedly want to issue. Other types of physical asset theft might target the lending companies themselves. Imagine a scenario where a borrower uses a fictitious name and address to receive a loan that is never paid back. Such a scheme could result in the loss of thousands of dollars that could be used to make legitimate personal loans. Sloppy due diligence, over reliance on technology, and lack of cybersecurity could all lead to fraudulent unsecured personal loan applications that are disastrous for the industry and for individual lenders.

But it doesn’t end there. Identity theft is another type of fraud that is growing and should be addressed, especially by companies in the financial services sector. The 2016 Identity Fraud Study by Javelin Strategy & Research found four significant trends surrounding identity theft:

1.       Even while less is being stolen through identity theft, there are more victims than ever before;

2.       New credit card security measures have resulted in a 113% increase in new account identity fraud;

3.       Consumers that don’t use transaction monitoring, email alerts, and other security measures are at a higher risk of being victimized

4.       18% of identity fraud perpetrated against U.S. citizens is done outside the U.S.

The major implication of identity theft for unsecured personal lending companies is account security. Because collateral isn’t being used to secure the loan, lending companies may opt for lesser security in the application process. This would be a huge mistake. Microbilt’s Identity Verification solution can for example easily be used to address this risk.

Overall, financial services companies are doing a good job of fighting fraud, however, there remain some weaknesses. The biggest driver of fraud in this sector is employee turnover. And it should also be noted that fraud most often occurs at the hands of a company or industry insider. More often than not, it is a junior employee or a senior or middle manager. While theft of physical assets ranks among the highest types of fraud in the sector, equal to it is information theft, loss, or attack.

Information theft is different than identity theft, though it could lead to identity fraud. It consists of consumer or company information being breached, often due to low data security standards. The fraudster steals information that would otherwise be personal and private. That may include borrower account information, social security numbers, personal loan details including payment history and interest, lender financial data, and more. Information theft often involves damage to multiple victims such as that in the Ashley Madison hack that happened in 2015. While the damage done wasn’t to victims’ financial status, the information theft did ruin some reputations.

Since globalization and technology are two of the main drivers of fraud in the personal lending sector, the rise of marketplace lending and peer-to-peer crowdfunding platforms is sure to increase the risk of fraud to consumers and businesses alike.

The Best Defense Against Any Type of Fraud

Companies that offer unsecured personal loans need to be vigilant in protecting consumers, the information they collect, and their business interests from people bent on defrauding borrowers and lenders. That requires an investment in business intelligence, cybersecurity, and due diligence.

The consumer information is in a chain of trust as it transitions from one company to the next. Therefore, all companies involved in the transaction need to be verified and adhere to the highest security standards in order to prevent any weak-link leaks.

The key to performing these risk management practices optimally rests with big data. As reliance on technology increases and personal lending companies continue to compete on a global scale, consumers of unsecured personal loans will expect financial services companies to invest in information protection assets and best practices. Those companies that do not will lose trust while those that do will earn consumer trust and succeed in the marketplace.