Fraud Detection: A Competitive Advantage for Online Lenders

The fundamental basis of above-average performance, in the long run, is sustainable competitive advantage.

–    Michael E. Porter

The concept and implications of competitive advantages are some of the most interesting topics in business; however, they are notions that are rarely associated with financial fraud prevention. We believe this is a mistake and will discuss why here. 

Fraud in Lending: An Inauspicious Variable

Everyone in the financial industry, especially those in lending, are aware of the impact of fraud in firms’ bottom lines and the alarming rate at which online fraud has grown lately. For example, a recent studio focused on online SMB loans found that firms have experienced an 8.3% increase in fraud over the past two years and that fraud losses as a percentage of revenue have increased 28.6% year after year, on average.^[1]

After years and years of seemingly endless exposure to application fraud, account takeovers, loan stacking, and other gimmicks, lenders all over the world have come to accept very high degrees of so-called “inherent fraud”. We think it is time to review this assumption and change optics from a fraud as a cost perspective to a fraud prevention as a competitive advantage mentality.

Continue reading for the top ways in which the right fraud controls can create a competitive advantage for lenders in the online space.

What do we mean by the right fraud controls, you ask?

Simple: The kind that we have implemented with lenders to enable them to improve operational efficiency by 5X, increase fraud detection by 20% with 95% accuracy, and reach the ultimate goal of <1% false positives.

1. Become more competitive by offering lower interest rates and maintaining or increasing revenues.

It’s no secret that lending is a competitive and highly fragmented market, with hundreds of firms offering similar credit products and a growingly sophisticated consumer base that can compare offerings, sometimes through aggregator services.

Lenders consider several factors when determining the rates they charge their users, including capital expenditures, operating costs, and risk variables. The right fraud controls can have a positive impact on this cost structure, especially by increasing the efficiency of operations (reducing the need for hiring more people to review applications in detail) and by cutting first payment default rates.

A lender that can reduce its costs by implementing a sound fraud prevention strategy can thus reduce the rates offered to customers, growing its effective user base, and setting itself up for long-term and sustainable growth.

2. Maximize transaction completion by improving user experience.

Amidst growing concerns about fraudulent applications, lenders and many other industries often turn to strengthen identification procedures. For example, some of them request more documents from their prospective customers, implement real-time ID validation with proof of life tests, or confirm applications by phone and email before disbursing funds.

It would be unwise to discourage the adequate implementation of KYC strategies; however, we must also bear in mind that a balance is needed to make sure that good borrowers are not deterred from applying for a loan.

The right controls can help you fight fraud in real-time without impacting the user experience, leading you to increase the rate of completed transactions beyond your competitors’ standards. The ultimate result would be more and better loans granted to happier customers more likely to return with their business.

3. Protect your reputation by reducing exposure to AML sanctions and bad press.

Companies and authorities all over the world have made huge strides in reducing the use of legitimate financial services to enable money laundering activities. Nevertheless, some criminals still find a way to taint the reputation of lenders by exposing them to sanctions from regulators and the ensuing bad press.

The right controls can enable you to translate your fraud-prevention insights into stronger AML compliance capabilities. This would allow you to re-direct your efforts and switch your organizational focus away from compliance and into your area of expertise: designing the best credit products to win in the marketplace.

Key takeaways:

Lenders can look at the glass half full and see that an investment in the right fraud controls can make them more competitive by enabling them to reduce the rates they offer while retaining or even increasing profitability.

If we work together to stop fraud in lending on its tracks, we can improve the business of lenders and the lives of consumers. Talk about win-wins!

At Datavisor, we are on a mission to redefine fraud prevention. Learn more about how we work with lenders here. If you still have doubts or want to see us in action, request a private 1:1 demo with one of our experts. Your bottom line will thank you.

^[1] Source: https://risk.lexisnexis.com/insights-resources/research/2020-smb-lending-fraud-study