Our software analyzes millions of unique documents every year. And our data shows that in 2021, 5% of all financial application documents submitted in an online channel were manipulated.
But so far in 2022, we’ve seen a document manipulation rate of 10%. And 8 out of 10 fraud and risk professionals said they’ve seen increases in fraud attempts over the past six months.
Fraud is continuing to be a problem for fintech and financial services companies today. And it comes at a great expense: Every $1 of fraud loss now costs U.S. financial services firms $4, compared to $3.64 in 2020. Synthetic identity fraud, alone, resulted in $20 billion in losses for U.S. financial institutions in 2020.
But what’s causing these dramatic increases in fraud? I recently had the pleasure of joining Rapid Finance Director of Operations Patrick Lord and BHG Fraud Analyst Michael Coomer for a webinar titled How to Prepare for a New Generation of Financial Crimes to answer this exact question.
Here’s a recap of what we learned.
Fintechs have always been a target for fraudsters, Patrick explained. Many fintech companies are built for speed and efficiency to create the best customer experience (and get new customers in the door faster), but fraudsters know that application speed and fraud rigor do not go together well.
“Companies like RapidFinance and other fintechs are here to provide capital more quickly than traditional institutions, and so we tend to be a little bit more streamlined — meaning that we’re naturally first going to be the first targets when it comes to fraud attempts,” he said.
When the SBA-backed Paycheck Protection Program launched to help struggling businesses during the pandemic, it was fintech companies who came in and provided a huge service to various government agencies by helping quickly distribute the funds to people who really needed them. But that also meant their business models were flipped upside down.
“When something like that happens, these fintechs aren't focusing on their core business of providing direct capital. So they went from providing working capital on let's say March 12, 2020, to three months later, where their sole focus is helping get government money out the door. And then, you know, then at some point they need to figure out right: How do we get back to our core business while also maintaining that?”
In addition to adjusting their business models, fintechs were also dealing with new risk factors — evaluating businesses where revenue disappeared over the last three months, while the business owners are dealing with governments putting restrictions or lockdowns in place.
All of these elements came together in a way that made it easier for fraudsters to take advantage of the fintechs who were helping to distribute government funds that people needed to survive during an unprecedented time. But that’s not all.
Over the past few years, we’ve also seen the rise of a new, digitally-minded generation of fraudsters; people who are using online gathering places to work together to commit fraud.
“Ten or twelve years ago — probably maybe even more recently than that — a lot of these fraudsters, they would need to be savvy in terms of going through the dark web to get a lot of the information that's [now] being communicated out there and open channels like Reddit and various Telegram spaces,” Patrick said. “And who knows how many other, various different places, I know, I've certainly gone down a lot of rabbit holes these past couple of years trying to figure out exactly what's going on in the fraudster's mind to try to stay ahead of it."
Social media websites, messaging apps, and other online forums are now hotbeds for online fraud rings. Criminals can and do use these spaces to share tips and tricks, share or sell information, and even sell fake documents like IDs.
“What I think is really interesting with the growth of platforms like Telegram, or other social media — even just Facebook, YouTube — is that the communication is going on in a less ‘official’ standpoint. We have fraud rings that are not part of a criminal organization, either street-level or larger,” Michael explained. “But they're communicating, they're sharing information in informal ways and, as a result, becoming fraud rings in a way that we haven't seen previously, which is really unique. So being able to recognize the similar usage of documents, formats, or templates is changing the way that we can approach this."
We’ve also witnessed the emergence of fraud-as-a-service, where consumers can pay to have someone create social media profiles or public records that allow them to misrepresent their identity. They might think they are paying a legitimate business to do a legal service for them, which leads us to the last reason fraud has been increasing.
The pandemic created external pressures that pushed otherwise legitimate individuals towards taking steps that they may not know at the time or necessarily recognize as fraudulent, Michael explained.
For individuals who were furloughed or lost their jobs, they were looking for some sort of support to get them through these very trying times. And it's so easy to just go online and google “pay stub generator.” Immediately, they're stepping into fraud. Then they gradually start getting pushed more towards additional types of fraud, as a result.
“Next, they may go on a YouTube channel that talks them through the steps of getting easy lending. If things don't get better for them, it becomes an easier thing to keep doing. And I think it's really difficult to assume that this is just going to suddenly go away once we return back to normal,” Michael said
Another driving force that Michael pointed out is the rise of credit repair services and credit protection numbers (CPNs). While legitimate credit repair services check your credit reports for information that shouldn't be there and dispute it on your behalf, credit protection numbers are a scam sold to consumers as a replacement for their social security number.
CPNs are nine-digit numbers that look like an SSN and are often advertised as a “new credit identity.” Many consumers purchase these numbers without knowing that they’re likely committing identity theft (as the nine-digit number was likely stolen from a real person), as well as potentially a federal crime. But many consumers simply may not understand the severity of what they’re doing.
"You see things people are doing that might look like they’re trying to take advantage of the system – innocently or not so innocently – and you have to wrestle with a lot of concerns like, ‘Is this a major character concern when evaluating that application? Or was it just not clear to that client that's not something that they were supposed to be doing?’ So, you know, you're kind of layer in that additional concern on top of all the complexity we're already dealing with,” Patrick explained.
While a unique (and possibly once-in-a-generation) combination of circumstances led to increases in fraud rates during the pandemic, we know that the techniques to defraud businesses adopted during this time will not go away.
The first step to navigating this changing landscape is to understand how we got here. But we also need to explore what to do about it. Check back later for the second article in this series, “How to effectively fight increasing fraud attempts (advice from experts)” to learn how Patrick, Michael, and other leaders in this space are staying ahead of fraudsters.
And if you want to learn more about how Inscribe’s AI-powered fraud detection can help you review documents faster while also detecting more fraud, reach out to speak with a member of our team.