Good news: The 2022 Payments Fraud and Control Survey found the lowest levels of payment fraud in U.S. organizations since 2014.
Bad news: 71% of the 550 organizations surveyed experienced fraud. According to the survey, checks and automated clearinghouse (ACH) debits were the payment methods most impacted by fraud in 2021, with 66% of those surveyed saying they’d experienced check fraud and 37% saying they’d experienced ACH fraud.
Businesses are fighting a losing battle against payment fraud. That’s especially true in industries where checks are still the predominant way to pay vendors, such as the auto dealership industry.
At this point, there’s no reason to keep writing checks, except that’s how business people have made payments for decades. During COVID, when doing check runs became more inefficient than ever, even large dealership groups clung to that process.
Now they’re being exposed to a new wave of check fraud powered by underground crime communities on the internet. The Inspector General for the U.S. Postal Service reports mail theft complaints increased 161% from March 2020 to February 2021.
Dealerships Are Targeted
Dealerships are vulnerable because they have always suffered from weak internal controls and a lack of duty segregation. In an ideal manual payment process, there should be one person who writes the checks, a different 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 dealer or the general manager also should be doing spot checks by opening the bank statements, reviewing the bank statements online and looking at cleared checks.
Even though this is all part of NADA training and manufacturer training, dealerships rarely implement that system. Of the thousands of dealerships we’ve worked with in our careers, we’ve seen just a handful with proper segregation of duties. But even with segregation of duties, you still have checks and check stock floating around the dealership where they can be easily stolen or even just photographed and replicated on a quality home printer.
Those dealerships that started paying some of their vendors by ACH are now contending with a rise in ACH fraud. According to the FBI, losses from business email compromise, the most common ACH theft tactic, have surpassed $43 billion globally. There has been an increase of 65% between 2019 and 2021.
Reducing Fraud Exposure
Outsourcing to a vendor payment automator eliminates fraud exposure in three ways:
- First, separation of duties is a system requirement, so straightforward tasks and controls are built into the technology. The same person cannot do approvals and check signing. They are configurable, so managers can separate those duties, which can be done remotely. Checks do not need to be walked around the dealership or left on people’s desks.
- Second, the payments provider collects all the vendor data, stores it securely in the cloud and updates it continuously. Any time there is an incoming request to change a banking account number, it must go through a rigorous validation process using both technology and humans to confirm the request is legitimate. Today’s fintech payment providers can do this at scale because they are built around large proprietary vendor networks (over 850,000 vendors in the case of Corpay) that already are enabled for ACH and virtual card payments.
- Third, there’s an opportunity to pay 20%-30% of your vendors by virtual card – the most secure method of payment. It’s not uncommon for dealerships to pay some of their vendors by card, but that is often done by reading the number on a plastic card over the phone, or by having a card on file with a vendor. Needless to say, this is also a fraud risk.
Virtual cards consist of a unique 16-digit number associated with a vendor name, merchant code and exact payment amount. No one can use them any other way. They are extremely difficult to steal and not appealing to thieves. Stealing a pile of checks or email addresses to phish for a big payday has a better ROI (Return on Investment).
Virtual cards have one similarity with plastic cards: You get rebates on your payments. When you leverage a vendor payment network to pay a greater percentage of vendors virtually, the rebates can add up over time.
Controls are hard for many industries, not just auto dealerships. It’s never the fun or sexy part of the business, and it’s not a moneymaker. But the lack of controls can lead to significant losses impacting dozens or hundreds of people expecting to have that money in their bank accounts.
Pam Cichoke (pictured, upper left) is vice president-Automotive Sales and Kyle Rauzi (pictured, left) is senior director-Automotive Sales for Corpay.