Surging fraud expenses eat into digital lenders’ bottom lines

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Lenders have long faced down the issue of fraud, but now, digital lenders are now facing even greater challenges. Digital lenders have become an easy target for identity and transaction-related fraud, compared with non-digital lenders, as criminals can now hide behind a mobile or computer screen.

This means that digital lenders, those lenders with 50 percent or more of their annual revenues through online or mobile channels, face higher costs of fraud than non-digital lenders. As the cost of fraud continues to grow, digital lenders need to implement a multi-layered approach to fraud prevention in order to protect both their customers, and their bottom-line.

Large digital lenders face higher fraud risks

Large digital lenders that earn more than $50 million in annual revenues through digital channels face the highest volumes of fraud, with an average of 1,959 fraud attempts per month -- over 50 percent more than non-digital lenders. Large digital lenders also have the highest number of successful fraud attempts; while non-digital firms successfully prevent 652 fraud attempts per month, large digital lenders are seeing some 1,458 fraud attempts slip through the cracks.

This drives large digital lenders’ fraud costs higher, compared to small digital and non-digital lenders. Our research shows that average cost of fraud for large digital lenders is $3.07 per dollar of fraud, accounting for 2.24 percent of large digital lenders’ revenues.

One of the reasons that large digital lenders face higher risks of fraud is because they are more likely to offer mCommerce solutions for their customers than small to mid-sized digital lenders. 94 percent of digital lenders currently allow mCommerce, compared with just over half of small to mid-sized digital lenders. However, while mCommerce channels, including mobile apps and text-to-pay, meet customer demands in a digital world, they also provide criminals with more opportunities perpetrate fraud. As early entrants into these mCommerce channels, large digital lenders face a greater risk of fraud, as criminals seek to take advantage of new, undetected weaknesses.

Small to mid-sized digital lenders lack resources to combat fraud

Small and mid-sized digital lenders, which earn less than $50 million in annual revenues, often have fewer resources to spend on fraud detection and protection, making it difficult to pinpoint the source of the fraud. A lack investment in specialized fraud prevention tools for international orders and transactions makes fraud prevention difficult, with nearly 40 percent of small to mid-sized lenders ranking this as one of their top 3 challenges when tackling online fraud. This leads to excessive manual reviews, many of which turn out to be false-positives in the end.

Mitigating the cost of fraud

When you’re out to stop a criminal, just having one net won’t do. To mitigate against the cost of fraud and protect both their customers and their bottom-lines, digital lenders should layer identity and fraud transaction-based solutions. This reduces the number of false-positives, successful fraud attempts, and the need for manual reviews.

The first step is to identify and track where fraud is occurring, in terms of costs and successful attempts. Without such tracking, the ability to tackle the cause of the fraud is significantly diminished. However, tracking doesn’t lower the cost and volume of fraud alone; digital lenders should still be adopting solutions to determine identities and potential fraudulent transactions, which can lower the need for manual reviews and incidences of false-positive.

By layering these solutions together, digital lenders – both large and small – can create a robust way to tackle fraud and protect their bottom lines. Digital lenders with an average of eight layered identity and fraud-transaction protection solutions have less than half the successful fraud attempts compared to those with just four layered solutions. This reduces the cost of fraud significantly, with digital lenders who have an average of nine layered solutions paying just $2.39 per dollar of fraud.

The digital lending industry will need to keep pace as criminals find new, sophisticated ways to perpetrate fraud. Protecting themselves, as they grow their online and mobile channel offerings for customers, is a must. In a constantly evolving digital landscape, layered identity and fraud transaction protection is critical for digital lenders and can be done while making the customer experience run smoothly.

*All facts and figures provided by 2017 LexisNexis Risk Solutions True Cost of Fraud Study – Digital Lending