How KYC in Banking Can Help Fight PPP Loan Fraud

The payment protection program (PPP) of the $2 trillion cares act, provided desperately needed funds to keep small businesses keep going during the covid-19 pandemic. To keep millions of Americans on the payroll, such loans are being forgiven. Yet all the perks that allowed these funds to be deployed so quickly, minimal paperwork, online loan applications, and others have offered fraudsters to exploit the system. 

Though this doesn’t mean that the next economic relief program must go back to slow paperwork fueled processes. Banks that utilize digital regulations like KYC can defeat the fraudsters while still quickly getting money to those who are in dire need of it. 

How Fraudsters Exploit the PPP Loan Process?

With millions of Americans almost about to lose their jobs to the economic crisis, it is crucial to get loans to small business owners fast and securely. This is the reason why governments have allowed web-based companies to keep a track of and arrange many loans.

Unfortunately, it turns out the FinTech companies processed 75% of the approved PPP loans that were somehow tied to fraud. This is shocking when you consider that FinTechs (and banks that relied on financial technology) consisted of just 15% of PPP loans processed overall.

In a lot of cases, a simple Google search or by accessing the state records would have revealed that some of the small businesses didn’t even exist. Normally, governmental bodies would penalize the financial institutions for approving fraudulent loans due to faulty KYC procedures. 

Under the circumstances, FinTechs and the banks that use KYC processes aren’t penalized. Instead, taxpayers have to carry the burden of fraud. The fact that banks and lenders aren’t currently being held accountable doesn’t mean that this isn’t a serious problem. First off, the reputational damage cannot be dismissed as all the stories of PPP fraud make the news. Secondly, the regulatory environment is always in flux. This is one of the reasons why future economic help programs may not be so lenient. 

Lenders, banks, and other financial services need to be prepared to prevent fraudsters from taking advantage of the digital systems that are made to help Americans in need. 

How KYC in Banking Helps Prevent PPP Loan Fraud?

The first rounds of PPP have already deployed funds, to real business owners and to fraudsters who were able to trick the system. The small business administration fraud hotline, which received less than 800 calls last year. This year, it has received over 42,000 reports about coronavirus-related fraud. At least $62 million was fraudulently taken from the PPP by fraudsters using fake documents, stolen identities, and forged certifications. 

Although it’s not too late for the banking industry to prepare for any of the future relief programs. A big part of that is figuring out how to do that is by preserving the strengths of PPP programs. Speedy and digital loan applications without sacrificing important banking KYC measures detect and mitigate fraud. 

To make this happen, banks will need to rethink their KYC procedures for the digital era. If the regulations are implemented the right way, the measures can surpass the old traditional methods. This will allow the banks to stay on track with their digital strategy while keeping the scammers out. 

During the PPP, the U.S. Treasury Department strictly instructed banks to prioritize their existing customers who apply for relief loans. This meant that FinTechs and alternative banks attracted new customers that required a more strict verification process. But in this highly pressured environment, careful verification became impossible and these FinTechs had to bear the losses that came along with fraud.

Banks or FinTechs that choose to accept unknown business’ loan applications are taking a risk as there is no strong verification process. They must take KYC measures just as they would during any customer onboarding process.

Companies operating in the financial industry must employ KYC quickly and easily to keep up with the growing demands in loan applications.

• KYC ID Verification

Banks and FinTechs have to ensure that a new customer trying to take out a loan is who they claim to be. This is highly critical given the use of synthetic identity fraud in PPP loans. But the continued threat of coronavirus combined with new remote expectations means that KYC ID verification checks have to go digital. 

Before customers fill their loan application form, the applicants should be able to digitally submit their government-issued photo ID and other online documents. 

• Digital Collection of Documents

The PPP loan application requires proof of business ownership, proof of payroll costs, proof that the business is active, and other business-related documents. In practice, some banks let these requirements slide due to the perceived time drain of collecting them. Today’s digital solutions allow borrowers to simply click a photo of their document and send them through a mobile or online system. This speeds up the application process and makes it harder for fraudsters to trick the system.

Digital KYC in Banking Can Eliminate PPP Fraud 

Unlike popular belief, lenders don’t have to choose between a seamless process and keeping out fraudsters. The remote lending process has made it easier for fraudsters to trick lenders by using synthetic identities or online documents. But remote KYC practices can keep fraudsters out and maintain the pace of loan deployment.