How to keep payment fraud from affecting your cash flow
Knowing how to detect suspicious activity is the first step in preventing payment fraud.
The issue of fraud impacts businesses of all sizes significantly. According to a study by the Association of Certified Fraud Examiners (ACFE), the average business loses up to 5% of their annual revenue due to fraud.1 Of those businesses, organizations with fewer than 100 employees are targeted the most frequently. They also lose a median of $155,000 annually.2
Any loss can significantly impact a business’s cash flow. Small business, therefore, should be educated on — and weary of — various types of fraud.
Common fraud types
Some common schemes include credit card fraud, identity theft, chargeback fraud, which is a forced reversal of a transaction after receiving the purchased item or service, and impostor fraud.
Impostor fraud is a breach that involves a scammer posing as a person or organization that an employee may know and trust, such as a vendor or loan representative. In many cases, the impostor will reach out via phone, email, fax, or mail and request payment for a fraudulent invoice or provide “updated” vendor payment instructions.
This form of breach is particularly difficult to identify because the payments are processed, authorized, and filed like a normal payment. Because the bank has previously noted similar (valid) payments, funds may be harder to recover.
Follow these best practices to help keep impostor fraud at bay:3
Educate staff on impostor fraud
Dual verification of the validity of payment requests
Monitor account activity for unauthorized transactions
Fraud prevention strategies
Mason Wilder, a research specialist for the ACFE, shares more on how small businesses can keep various forms of fraud at bay.
Train employees to spot in-person fraud: Business owners can invest a small amount of time and use free resources, such as the U.S. Small Business Administration, to educate employees on how to spot suspicious customer behavior, Wilder says. Teach employees how to spot counterfeit bills, and if you accept checks, make sure employees always ask for ID. “A suspicious customer will act rushed. They may try to distract the teller with random conversation or have a strange ID,” Wilder says. “They may also try to make a very large purchase right before the close of business.”
Monitor point-of-sale or payment systems: Consider limiting access to point-of-sale or payment systems and inspecting equipment for tampering on a regular basis.
Invest in fraud detection software: Wilder recommends using a fraud monitoring program, which runs every transaction through an extensive data analysis before it is processed. These programs can look for the type of device the purchaser is using, such as a prepaid cell phone, and if an account number has been flagged before.
Don’t ship merchandise until a transaction has cleared: Small businesses with online orders should always wait to ship a product until a payment goes through, Wilder says.
Look for trends in your books: Fraud is frequently an inside job: 40.9% of fraudulent activity is committed by employees and can take up to a year to detect.1 Wilder suggests paying close attention to your financial history. Ask yourself: Is suspicious activity happening when one particular employee is working? Is it during a certain time of day? What else can you conclude from your own data? If you spot a significant correlation, consider how you can address and resolve the situation.
1 “Report to The Nations On Occupational Fraud and Abuse: 2016 Global Fraud Study,” Association of Certified Fraud Examiners, 2016.
3 “Impostor Fraud: Do You Know Whom You’re Paying?”, Wells Fargo, 2014.