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Mar 2022 | Credit Decisions | Fraud Prevention

Commercial fraud is on the rise

UK Finance reported a 30% increase in losses from fraud between the first halves of 2020 and 2021, despite the best efforts of the banking and finance industry. Lenders’ existing defences blocked the theft of a further £736m.

SME lending presents fraudsters with many opportunities to strike – not least because it isn’t feasible to refer every SME credit application for the most rigorous manual underwriting.

And, as the FCA has made clear, lenders can’t shut down a whole orchard of lending opportunities because of a few bad apples.

As such, more and more SME lenders are turning to automated Open Banking solutions, such as Commercial Acumen from Experian, which provides a simple and affordable but robust defence against fraudulent loan applications.

Fraudsters’ four key tactics – and how Commercial Acumen thwarts them

In response to fraud in the bounce-back-loan scheme (BBLS), the FCA identified four main tactics used by fraudsters.

1. Making applications on behalf of fake businesses

Individuals apply for loans for firms that do not exist or were set up only for fraud, before disappearing.

2. Identity fraud – assuming the identity of a legitimate director

The fraudster takes on the identity of a legitimate director of a legitimate company. They then make an unauthorised loan application in the hope of syphoning off the borrowed funds for personal gain, leaving the legitimate director to face the consequences.

How Commercial Acumen blocks these tactics

Tactics 1 and 2 are blocked by effective identity verification – proving that the company exists and that the person claiming to be the director is indeed that person.

  • With Commercial Acumen, an applicant selects their business from a database of those registered with Companies House.
  • Next, they select their name from a list of registered directors of that company. We verify their identity against a host of trusted sources, proving they are whom they say they are.
  • Only once identity has been verified can an applicant go any further.

Experian Commercial Acumen makes it quicker, easier and more cost effective to lend to small businesses.

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3. Making applications on behalf of dormant companies

Many fraudulent BBLS applications came from dormant or even dissolved companies. This gap in lenders’ defences exists because they don’t always have the most up-to-date information about each company’s financial situation.

How Commercial Acumen blocks these tactics

  • Experian’s technology gives a detailed picture of a firm’s current financial health via an income-and-expenditure report for up to three years.
  • Experian pulls this data directly from business accounts, then generates a single, reliable version of the truth.
  • This gives lenders confidence and clarity to make decisions and cuts out the opportunity for fraud in self-reporting.

4. Directors lying about key information on application forms

First-party fraud – carried out by directors themselves – is historically tied to recessions. It often involves misstating turnover levels. As the cost-of-living crisis bites, it will be ever-more crucial for lenders to assess the viability of companies applying for credit.

Commercial Acumen throws a spotlight on business viability

  • Commercial Acumen delivers a categorised analysis of over 45 different types of transactions – both incomes and expenditures – on business accounts.
  • These include wages, expenses, income, profitability and the number of times an applicant has entered their overdraft. From these, lenders get a fundamental understanding of how a business operates day-to-day.
  • For SMEs in shifting circumstances, Commercial Acumen develops cash flow aggregates so lenders can make decisions with confidence.

So lenders can get credit to SMEs who need it, without eroding their profit margins with expensive manual checking and underwriting.

An increase in fraud shouldn’t lead lenders to shut out small businesses. The opportunity to serve an estimated 70,000 creditworthy firms currently denied credit can be profitable, provided the door is shut to fraudsters and opened for creditworthy firms.