By Nicolas Rabinovitch, Head of Data Science & Fraud at Hokodo.
Global losses from payments fraud tripled between 2011 and 2020, reaching a record high of $32.39 billion. That figure is predicted to increase by a further 25% in the next four years, making fraud prevention strategies imperative for all businesses, not least those who deal with B2B customers and so potentially face some of the greatest basket values. But knowing that you need to work on fraud prevention and understanding how to do it are two different things.
What steps can B2B businesses take to reduce payment fraud?
With the UK in recession – and predicted to remain so for the whole of 2023 – British businesses face a difficult time. Increasing the likelihood of B2B suppliers facing defaulted payments and payment fraud. But there are steps that B2B businesses can take to help protect their assets.
While no one invites fraud into their business, there are some fairly common payment practices that can enable would-be fraudsters to get away with missing payments. And one of them is a lack of visibility in the payments process. The businesses with the lowest number of successful payment fraud cases are those that monitor the payments journey from the issuing of an invoice to the completed transaction. So, create a system where you can easily track each and every invoice, and can see where it is within the payments process. This will help you to identify potential risks, while improving cash flow, and enabling you to make better decisions as the customer relationship develops.
Digitising accounts receivable has become a popular move amongst larger businesses. And it is now trickling down to SMEs, simply because, once initiated, it is much more cost-effective, and it can dramatically improve accuracy. Which is better for compliance, and better for fraud detection.
Use alternative payment types
According to UK Finance research, total fraud loss in the UK reached £1.26bn in 2020. 45% of this was attributed to credit, debit, and other payment cards. An additional 38% came from authorised push payment (APP) scams, where scammers pose as a genuine company the customer is already doing business with, in order to fraudulently complete what would have been a genuine transaction. The most infamous instance of this has been with fraudsters posing as estate agents for the final transfer of funds following a property purchase. However, almost all forms of payment can be subject to fraud. The only real way to avoid that risk is to work with secure, digital payment providers, so the risk is passed on to somebody else.
The use of alternative data sources
Credit checking has relied upon the same process for decades. Businesses use the established credit bureaus to check a fixed criterion, which will show them a customer’s creditworthiness based upon their past behaviour. But while past behaviour is useful to know, this system doesn’t look into a business’s current circumstances. This can lead to businesses on the brink of administration, that just happens to have an excellent credit history, taking down their suppliers with them. It is now possible to use alternative data sources – such as open banking data or digital footprints – to prevent that from happening.
Treat every customer the same
In B2B sales, it is easy to become complacent as you build relationships with longstanding customers. But that’s opening the door to loss, particularly in straitened times. Just because you have supplied a customer for a decade, it doesn’t mean that they are immune to the fluctuations of the market. So, it’s prudent to run the same checks every time for every customer. It’s only the customers that you maybe shouldn’t be trusting who will take offence.
Right now, it is projected that payments fraud will have increased to cost $40.62 billion by 2027. This is in part because of the difficult economic climate and the impact of global events – the energy crisis, and the war in Ukraine. And partly because people are becoming savvier and finding it easier to take advantage of holes in the system. If you don’t take steps to protect your business, you can almost guarantee that the fraudsters will find a way in, whether maliciously, or because they have no other choice.
Nicolas Rabinovitch – Head of Data Science & Fraud
Nicolas is leading the Data Science and Fraud team at Leading B2B Buy Now, Pay Later (BNPL) provider Hokodo. He is responsible for developing credit risk models and fraud detection capabilities across all geographies.