What are the most common frauds in small and medium-sized businesses, and their impact?

According to a recent Nationwide survey, small-medium-sized (SMB) business owners in the US are becoming increasingly concerned about the potential for cyberattacks to disrupt their operations. Identity fraud is a pervasive issue that impacts individuals and businesses of all sizes.

Small and medium-sized businesses face unique challenges that make them particularly vulnerable to small business fraud. In today’s digital age, identity verification cannot be overstated, especially for SMBs. It serves as a critical defense against fraud and identity theft, which have been rising steadily.

 Key takeaways on SMB business fraud:

• Identity fraud cost U.S. businesses $56 billion in 2020, disproportionately impacting SMBs that often lack the resources to absorb such losses.
• AI-driven fraud is escalating the risks for SMBs, with the Federal Trade Commission reporting 5.7 million fraud and identity theft cases in 2023.
• Advanced identity verification is essential to combat sophisticated fraud schemes, including synthetic identities and deepfakes.
• Implementing flexible and effective security solutions helps SMBs prevent the high costs associated with fraud.
• Staying proactive allows SMBs to protect their business from fraud and focus on their bottom line.

Common types of small business fraud to watch out for:

In 2024, small business owners continue to face several types of fraud, with key trends emerging:

Ransomware and malware attacks: 

Ransomware remains one of the biggest threats to SMBs, with attackers often targeting small businesses due to their relatively weaker defenses. These criminals encrypt business data and demand ransom payments. Malware, such as keyloggers and spyware, is also commonly used to steal credentials and gain unauthorized access to sensitive information.

Phishing scams and social engineering: 

Phishing is a common scam, where cybercriminals use deceptive emails or text messages to trick employees into revealing sensitive information. Business email compromise (BEC) and other forms of social engineering have been rising, with fraudsters impersonating executives to steal funds or manipulate debit card and credit card transactions.

Fake invoices and synthetic identity fraud: 

Fake invoices are a frequent method used to defraud businesses. Coupled with synthetic identity fraud—where criminals use real and fake information to create false identities—these scams can be particularly harmful. These fake identities are then used to open accounts or conduct transactions, often leaving SMBs with substantial losses.

AI-driven fraud: 

Generative AI has enabled fraudsters to use deepfake technology to create convincing fake identities, voices, and videos. AI is also being leveraged to automate phishing scams and other fraud schemes, making these attacks harder to detect.
A Nationwide survey found that 25% of small business owners experienced AI-related scams over the past year, involving impersonation attempts using email, voice, or video. AI-driven fraud can bypass traditional security measures, making it crucial for businesses to adopt advanced fraud detection tools.

In 2023, the 5.7 million reports of fraud and identity theft, a stark reminder of the growing threats posed by AI-enhanced fraud schemes.

Business Email Compromise (BEC):

BEC attacks involve fraudsters gaining access to a company’s email system and impersonating trusted figures like executives or vendors. These scams often result in fraudulent transactions and significant financial losses for the business owner.

Impact of fraud for SMBs

Financial impact 

Identity fraud can have devastating financial implications for SMBs, which often operate with limited financial buffers and tight cash flows. Small business owners may fall victim to direct financial losses, such as unauthorized transactions or fraudulent charges on debit card and credit card accounts. Moreover, indirect costs—such as legal fees, regulatory fines, and the loss of customer trust—can cripple small businesses.
Identity fraud is a pressing concern for businesses worldwide, with far-reaching consequences that extend beyond immediate financial losses. In 2020, identity fraud cost US businesses an estimated $56 billion, highlighting the severity of this issue. Identity fraud is multifaceted, affecting various aspects of a company's operations and finances.

Compliance and trust

Beyond preventing fraud, identity verification plays a critical role in helping SMBs comply with regulations such as Anti-Money Laundering (AML) and Know Your Customer (KYC) laws.
Adhering to these regulations helps businesses avoid legal penalties and enhances their credibility with customers and partners. By following these guidelines, small business owners can establish themselves as trustworthy entities, build lasting relationships, and secure a competitive advantage.

Operational disruptions

Fraud can significantly disrupt business operations, diverting time and resources from core activities. Investigating fraud often requires internal audits, forensic accounting, and cooperation with law enforcement, which can delay day-to-day operations.
This operational downtime can lead to decreased revenue, delayed product delivery, and a reduction in customer satisfaction. In competitive markets, these disruptions can have long-term effects, including loss of market share.

Insurance premiums and reputational damage

The indirect costs of small business fraud extend beyond financial losses. After experiencing fraud, businesses may face increased insurance premiums due to the heightened risk of future fraud incidents.

Furthermore, the reputational damage from identity fraud can be long-lasting. News of a security breach can spread quickly, eroding customer trust and making it difficult to attract new business. Protecting your business with strong anti-fraud measures, such as identity verification and employee training.

Reputational damage

Identity fraud can cause long-lasting reputational damage, often surpassing immediate financial losses. This erosion of trust can lead to a decline in customers and revenue, as negative publicity from breaches spreads quickly, making recovery challenging.

How can Veriff help your business? 

Investing in advanced identity verification solutions is critical to protecting your business from fraud. These solutions help prevent unauthorized access to sensitive information, protect against fake invoices, and minimize the risks of synthetic identity fraud. By implementing both ID verification (validating government-issued IDs) and full identity verification (proving the individual is who they claim to be), SMBs can build trust with customers and protect their bottom line.

To effectively combat fraud, small business owners must take a multi-layered approach. This includes staying informed about new fraud techniques, implementing identity verification systems, and educating employees about the common scams they might encounter.
Additionally, biometric verification—using physical characteristics to confirm identity—can be a valuable tool for enhancing security. By integrating these measures, small businesses can create a safer environment for both their employees and customers.

Veriff provides SMBs with scalable identity verification solutions that help protect your business from fraud. With Veriff’s platform, small businesses can quickly and efficiently verify users, ensuring compliance with AML and KYC regulations, while safeguarding against the latest fraud techniques. By adopting Veriff’s self-service platform, SMBs can secure their operations, protect sensitive information, and focus on growing their business.