Incoming payments fraud – losses are mounting
by Pushpendra Mehta, Executive Writer, CTMfile
Fraud is on the rise and getting more sophisticated. Organizations are concerned that increasing losses from payment fraud may get worse in 2023. “Among companies with global annual revenues over US$10 billion, 52% experienced fraud during the past 24 months; within that group, nearly one in five reported that their most disruptive incident had a financial impact of more than $50 million”, according to the PwC’s Global Economic Crime and Fraud Survey 2022.
With criminals looking to exploit organizational vulnerabilities, it is necessary that companies secure all aspects of their businesses, and that includes outgoing and incoming payments. “Organizations have invariably focused on securing outgoing payments, or their accounts payable (AP) systems, yet many have neglected to secure their incoming payments, or accounts receivable (AR) processes, leaving the latter open to attack”, as per the B2B Payments Fraud Tracker® Series produced in collaboration with nsKnox and PYMNTS.
AR fraud costing companies millions
One of the most common types of AR fraud is internal fraud. A survey by the Association of Certified Fraud Examiners (ACFE) titled Occupational Fraud 2022: A Report to the Nations found that the average loss associated with internal fraud was nearly $1.8 million per case.
Internal fraud occurs when employees engage in fraudulent activity to steal from or deceive their employer. It often remains under the radar, and we seldom hear about losses arising from this type of fraud because of companies’ concerns about reputational damages.
“Moreover, AR fraud arises not merely from bad insiders. Fraudsters are hacking into the email servers of large and well-known companies, then contacting their B2B customers and duping the latter into paying invoices to fraudulent bank accounts by pretending to be finance employees”, the B2B Payments Fraud Tracker® Series explains.
Benefits of securing incoming payments
Incoming payment fraud occurs because of the absence of internal controls or the presence of weak or ineffective internal AR controls, which demonstrates the need for companies to modernize the systems that govern incoming payments.
Source: B2B Payments Fraud Tracker® Series
“If done right, a streamlined and secure AR system would limit the ability of rogue employees as well as external fraudsters to steal funds”, the Tracker notes. In fact, improving these systems can significantly increase operational efficiency and help boost cash flow, considered the lifeblood of a business.
Invoice fraud is a pervasive problem
“Invoice fraud comes in many flavors, ranging from criminals changing bank account information on invoices to internal bad actors diverting funds away from their own companies”, states the Tracker.
New research reveals just how costly invoice fraud can be. Based on the latest Medius Financial Professional Census survey of nearly 2,750 senior finance executives across major markets in North America, Europe and Asia, “Invoice fraud led to an average estimated annual cost of $280,000 per company over the past 12 months. During this time, the surveyed companies reported a combined 34,000 invoice-fraud cases, equating to nearly one case per month for each company.”
Technology, identity verification, speed and authentication needed to tackle incoming fraud
Automated and digital solutions, identity verification and speed are critical and central to improving incoming payment processes.
Companies relying on manual AP and AR processes are struggling to keep up. According to PYMNTS research, “Fraud, for example, limited international growth for 36% of companies using reactive, manual detection solutions, compared to just 5% of businesses using proactive, automated solutions. The same survey research found that nearly half of organizations that implemented automated solutions for digital identity verification and fraud prevention were at least very satisfied with their current solutions, compared to just 17% of companies using manual solutions.”
Organizations can use digital solutions to augment their AR systems in a variety of ways. One of them pertains to identity verification capabilities. As per the same PYMNTS survey research, identity verification is one of the top three challenges companies face, yet a mere 38% of businesses use document and identity authentication tools, indicating the importance of adopting new digital solutions.
“Inadequate verification tools leave companies exposed to a greater risk of fraud. A company that does not properly verify its business partners’ identities or payment details might send funds or sensitive information to a criminal instead, potentially jeopardizing both AP and AR streams. Insecure email transfer of data could be vulnerable to hackers who can divert AR payments from B2B partners by posing as company executives. It is therefore crucial that companies adopt tools that ensure payment information is accurate and secure”, advises the PYMNTS research survey.
The speed of incoming payments is another focal area where digital solutions can assist, given that PYMNTS data found that 38% of survey respondents cited long waits before receiving payments as a key challenge.
Given the palpable shortcomings of manual processes, more companies are turning towards leveraging digital solutions to advance or modernize AP and AR processes.
Source: B2B Payments Fraud Tracker® Series
“Authentication is necessary to stop invoice fraud”, cautions Candler Eve, vice president and director of enterprise fraud at MidFirst Bank, in the B2B Payments Fraud Tracker® Series.
MidFirst Bank suggests three tips for avoiding invoice fraud:
- Never handle a request through email alone.
- Be sure to talk through a secure channel. Eve corroborates this and says, “Rather than solely relying on email, the bank will call the person on an authenticated phone number to confirm the details. It’s amazing the amount of fraud you can prevent with a simple phone call.”
- Always authenticate the person’s identity and information. Eve advises companies “To ensure that they are authenticating all requests and invoices, especially when they originate from third parties. Similarly, companies should always authenticate when establishing a new relationship or changing an existing one.”
B2B payments volumes are expected to grow at a compound annual growth rate of 6% from 2022 to 2030. This will present many opportunities for criminals and saboteurs to probe for vulnerabilities in incoming corporate payments.
Corporate finance and treasury professionals will have to remain vigilant to spot the next AR or invoice fraud, and that means that while criminals are thinking of innovative methods to infiltrate organizations, corporations will have to secure incoming payments by adopting digital solutions, verification, speed and authentication to combat the menace of incoming payments fraud.
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