Good news: The 2022 Payment Fraud and Control Survey found the lowest levels of payment fraud in US organizations since 2014.
Bad news: 71% of the 550 organizations surveyed have been victims of fraud. According to the survey, checks and Automated Clearing House (ACH) debits were the payment methods most affected by fraud in 2021, with 66% of respondents saying they had been victims of check fraud and 37 % who say they have been victims of ACH fraud.
Businesses are fighting a losing battle against payment fraud. This is especially true in industries where checks are still the predominant way to pay suppliers, such as the car dealership industry.
At this point, there’s no reason to keep writing checks, except that’s how business people have been making payments for decades. During COVID, when check cycles have become more inefficient than ever, even large dealer groups have clung to this process.
Now they are exposed to a new wave of verify fraud fueled by underground criminal communities on the Internet. US Postal Service Inspector General Reports Mail Theft Complaints Are Up 161%from March 2020 to February 2021.
Dealerships are targeted
Concessionaires are vulnerable because they have historically suffered from weak internal controls and a lack of segregation of duties. In an ideal manual payment process, there should be one person who writes the checks, another person who signs them, and then a third person who reconciles the accounts – ideally someone outside the store, such as a CPA or auditor. The dealership or general manager should also perform spot checks by opening bank statements, reviewing online bank statements, and reviewing cleared checks.
Even though this is all part of NADA training and manufacturer training, dealerships rarely implement this system. Of the thousands of dealerships we’ve worked with over our careers, we’ve only seen a handful with proper segregation of duties. But even with segregation of duties, you still have checks and check inventory floating around the dealership where they can be easily stolen or even simply photographed and reproduced on a quality home printer.
Dealerships that have started paying some of their suppliers through ACH are now facing an increase in ACH fraud. Losses due to business email compromise, the most common ACH theft tactic, have exceeded $43 billion worldwide, according to the FBI. There was a 65% increase between 2019 and 2021.
Reduce exposure to fraud
Outsourcing to a vendor payment machine eliminates exposure to fraud in three ways:
- First, segregation of duties is a system requirement, so simple tasks and controls are built into the technology. The same person cannot do the approvals and sign the checks. They are configurable, so managers can separate these tasks, which can be done remotely. Checks don’t need to be walked around the dealership or left on people’s desks.
- Second, the payment provider collects all data from the provider, stores it securely in the cloud, and updates it constantly. Whenever there is an incoming request for a bank account number change, it must go through a rigorous validation process using both technology and humans to confirm that the request is legitimate. Today’s fintech payment providers can do this at scale because they’re built around large networks of proprietary providers (over 850,000 providers in Corpay’s case) that are already enabled for ACH and card payments. Virtual.
- Third, you have the option of paying 20% to 30% of your suppliers by virtual card, the most secure payment method. It is not uncommon for dealerships to pay some of their suppliers by card, but this is often done by reading the number on a plastic card over the phone or having a card registered with a supplier. Needless to say, this is also a fraud risk.
Virtual cards consist of a unique 16-digit number associated with a provider name, a merchant code and the exact payment amount. No one can use them otherwise. They are extremely difficult to steal and do not appeal to thieves. Stealing a stack of checks or email addresses to phish for a big paycheck has a better return on investment (ROI).
Virtual cards have a similarity to plastic cards: you get discounts on your payments. When you leverage a vendor payment network to virtually pay a larger percentage of vendors, discounts can accumulate over time.
Controls are difficult for many industries, not just car dealerships. It’s never the fun or sexy part of the business, and it’s not profitable. But the lack of control can lead to major losses affecting dozens or hundreds of people who expect to have this money in their bank accounts.
Pam Cichoke (photo, top left) is Vice President – Automotive Sales and Kyle Rauzi (photo, left) is Senior Director – Automotive Sales for Corpay.