The Top 5 Ways Fraud Damages Lenders and Consumers–and How to Fight it

As fintech lending becomes more prevalent, fraudsters are taking advantage of the vulnerabilities in the digital space. We’ve explored the top 5 ways fraud affects lenders and consumers and ways they can fight fraud to minimize damage.

Top 5 Effects of Fraud on Lenders

1. Financial loss: When lenders unknowingly extend credit to applicants who have no intention of repaying a loan, they can experience losses beyond established budgetary considerations. These can add up with each subsequent incident and become difficult to recover.  
2. Reputational damage: A lender who is constantly victimized by successful fraud attacks can suffer reputational damage in the market, being perceived as lacking adequate security measures or being lax in lending practices.  
3. Adverse effect on business: Excessive reputational damage can lead to diminished borrower confidence and trust. In these cases, borrowers may hesitate to do business with a particular lender, which can negatively impact business.  
4. Legal consequences: If a lender fails to prevent fraud or is complicit in faulty lending practices, they can incur fines and penalties, and be subject to lawsuits. These consequences can drain them of time and money, not to mention expose them to reputational risk. 
5. Increased operational costs: When effective fraud mitigation efforts are absent on the front end, lenders can end up paying heavily on the back end.  For instance, repeated instances of fraud can mean having to hire additional staff solely to investigate fraud cases or keep legal representation on retainer, which can drain profitability.  

In addition to the above, fraud can also cause strain on relationships with investors, who may feel wary about backing a lender who has a history of unmanaged fraud-related activity and unexpected financial losses due to fraud.  

Top 5 Effects of Fraud on Consumers

1. Debt Accumulation: Fraudulent activity can cause invalid and unexpected debt accumulation for consumers. Worst of all, they can be held liable for repaying loans they didn’t apply for or charges they didn’t make. 
2. Emotional Stress: Being a victim of fraud or fighting to resolve it can be emotionally draining and stressful on consumers. Often they can suffer feelings of violation and helplessness, which can take a toll on mental health. 
3. Loss of Time and Resources: Resolving fraudulent activity can be time-consuming. Consumers can end up spending time and resources gathering evidence and working with lenders and credit reporting agencies to correct their credit reports.  
4. Reduced Access to Credit: When lenders report delinquent payments and charge-offs—even if they’re because of fraud—it can damage legitimate consumers’ credit scores. Derogatory credit can make it difficult for consumers to secure credit in the future. 
5. Negative Impact on Financial Goals: Fraud can negatively impact the financial ambitions of consumers. Important purchases like a home or other major investments can be postponed or draw higher interest rates and fees, making it more difficult to achieve financial goals.

Minimizing the Impact of Fraud

Javelin Strategy & Research revealed that identity fraud losses spiked in 2021 to $24 billion–a 79% increase from 2020. Also, the number of consumers affected by traditional identity fraud grew over 50% to more than 15 million people. However, lenders and consumers don’t have to fall prey to the statistics. 

To combat fraud, consumers should monitor their credit reports regularly, report any suspicious activity, and be cautious about sharing personal information. 

Lenders should implement background checks, request official documents that verify identity, and monitor for suspicious or unusual spending behavior.

However, with the advent of technology, manual efforts at detecting and preventing fraud are often no longer sufficient. To keep fraudsters at bay, lenders need to use software that employs artificial intelligence and machine learning to detect patterns of fraud and identify potential risks, which has the added benefit of making the application process smoother for legitimate borrowers.

How Point Predictive Joins the Fight

Point Predictive’s solutions leverage the right combination of artificial intelligence and natural intelligence to detect income and employment fraud that can otherwise go undetected with traditional methods. 

Our income validation solution detects 60%-80% of inflated incomes, and our employer verification solution pulls from our proprietary data repository to identify more than 17 million legitimate and suspicious employers. Book an appointment with our experts to learn more on how our AI-driven solutions can help you combat fraud in the fintech lending space.