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The Essential Fraud And Risk Guide For Factors To Traverse COVID-19

Thursday, September 10, 2020

Fraud is always a risk in factoring, but the current COVID-19 pandemic has only exacerbated threats

EQ's Michael Ellis, Managing Director, EQ Riskfactor, shares eight fraud-avoidance tips that factors should utilize to get through the pandemic and come out stronger on the other side. This article was written for, and features in Commercial Factor, August 2020.

MICHAEL Michael Ellis Managing Director, EQ Riskfactor

The COVID-19 pandemic has impacted our personal and professional lives far deeper than any of us anticipated, creating a surprising willingness by even the largest organizations to digitize, seemingly overnight. It’s human nature to adapt to challenges quickly; removing internal barriers to change has allowed us to embrace methodologies that provide long-term benefit.

Equally, one of the challenges to factors is the ability for fraudsters to respond just as quickly, using the reduced contact and process changes as a veil under which to operate. If you add the extreme financial pressure that small businesses find themselves under, previously trusted clients can find themselves with an impossible decision as they look to support long-term employees and suppliers. Even the best clients can later find themselves in serious breach of their facilities.

Despite CARES Act provisions exceeding Congressional support from the 2008 financial crisis, a survey by Main Street America predicted 7.5 million small businesses will shut down permanently if business disruption caused by COVID-19 continues unabated. Deloitte predicted that the U.S. economy will not return to pre-COVID-19 levels until 2023, with pre-pandemic employment levels not returning until 2025.

The Harvard Business Review highlighted uncertainty around the shape of recovery as one of the most significant challenges. Factors will need to consider all scenarios carefully when deciding how they will support their clients. So far, Canada has demonstrated a ‘V’ shaped, sharp return to growth, while the U.S. has had a more gradual ‘U.’ Greece has had a more damaged ‘L,’ but no one knows enough about the virus and its impact on our economy to rule out a ‘W’ style movement as the risk of spread persists.

If there is one thing that studying global actions against COVID-19 has taught us, it’s that the implementation speed of preventative measures is as important as the actions taken themselves. Taking the following risk-reduction steps can help prepare your business, staff and clients.

1. Ensure you have clearly documented, consistent policies and processes

Fraudsters are ready to take advantage of business disruption. With remote working, the same strict risk processes are not always in place. Businesses need to invest time in a thorough risk assessment of how COVID-19 has disrupted operations. Otherwise weakened controls leave you at risk of fraud. Changes to your team mean, you will need to consistently define who is responsible for what actions and it is sensible to set a named owner for documenting and rolling out processes and procedures. Refreshing approval paths and introducing segregation of duty also will help to reduce risk.

In a remote work environment, teams do not have colleagues around for quick queries, which can lead to problems in escalating any issues. An easy solution is to implement buddy structures to ensure teams feel supported and risk is reduced.

Rather than reinvent the wheel, network with peers in your industry to apply best practices to processes and keep abreast of any recent fraud developments. It also is vital that your IT security is updated, and businesses may wish to consider using SaaS solutions over older local infrastructure.

2. Use workflow tools to improve adherence, increase efficiency and provide oversight

Technology enables managers to quickly identify issues and take action to check that activity is genuine. This is now more important than ever to ensure risk is reduced.

One option is to investigate specialist software that can alert you to unusual invoicing, changes in payment patterns and unexpected fluctuations in credit note levels as soon as they happen.

Some lenders use technology to categorize customers into either ‘growers’ or ‘shrinkers.’ If revenue grows above a certain level, an alert is triggered. Any new revenue spikes are investigated to ensure no ‘fresh air’ invoicing is happening.

3. Reset your risk parameters and facility covenants

Assessment of risk is best through assessment of trends. During the pandemic, the appropriate triggers should be reset to correct levels to ensure covenants are realistic. This allows a risk-based approach to managing your portfolio, increases efficiency and ensures you prioritize resources appropriately. Your credit criteria for new clients also should be updated, even on an interim basis, to provide clarity on your risk appetite to all colleagues.

4. Utilize modern tools to increase field examinations using risk triggers

COVID-19 has made field examinations exceedingly difficult, but several strategies can help overcome the need to visit clients face-to-face. One approach is to move from outdated periodic examinations to scheduling on risk triggers. This can reduce frequency and lead to a more efficient process. This, combined with desktop field examinations and video calling, can replace many on-premise visits. For the highest risk clients, audit frequency can be changed from quarterly to monthly to ensure changes are picked up quickly.

Businesses can utilize the latest technology in data extraction and risk to improve visibility on client performance, improve data accuracy and make faster decisions for clients.

5. Monitor high risk portfolio exposure to debtors and sectors

The best way to secure the longevity of your business is to ensure your risk is diversified. Implement portfolio analysis tools that enable you to monitor company policy on exposure to single clients, debtors and sectors.

You should divide the portfolio into risk categories and implement action plans to reduce over-exposure and limit the onboarding of clients that will adversely affect your concentrations. In contrast, there is also an opportunity to actively target businesses that operate in your under-represented demographics.

6. Increase customer support and early intervention

Maintain or establish honest dialogue with your clients by acknowledging the potential for hardship so that you can agree on possible alternative solutions. Even your traditionally stronger (and quieter) clients will need increased contact to ensure they have the appropriate support as cash flow is strained during the return to normal trading patterns. Formally extending facility amendments may help provide structure to your support and ultimately increase your oversight, reducing the risk of default.

7. Ready yourself for growth opportunities with effective onboarding

The COVID-19 pandemic is leading businesses that previously avoided factoring to consider the product, presenting an opportunity for growth. These new customers will expect fast decisions and rapid access to finance and will prefer simpler forms of banking interaction. Businesses that embrace technology and adapt digitally will be best placed to take advantage of this new growth opportunity. Exploring electronic documents, data integrations and online applications with decision engines can improve efficiency and reduce risk while improving the client experience.

8. Use this time to upskill teams with industry training

During the pandemic, we are increasing our consultancy capabilities and working with clients to spot process weaknesses and training gaps across their teams. It is important to develop a learning culture within the business and share best practices to ensure teams have the right skill set to manage risk effectively.

For many younger team members, this will be the first economic downturn they have experienced. It is important that managers check-in and ensure knowledge is embedded to make sure teams have the right skill set needed to manage risk effectively during the pandemic. It is also the ideal time for colleagues to take advantage of online training courses.

Factors are approaching the next few months very carefully and expect customers to be under increased cash flow pressure as recent loans start to be repaid. The market continues to be very volatile and there are fears of future lockdowns, more job losses, further economic pressures and more business closures.

Despite these challenges, factors that have invested in and adopted technology, nurtured customer relationships, invested in training and implemented streamlined approaches to lending will come out with stronger and more robust risk management, ensuring they can thrive ahead of their competitors.

Contact EQ Riskfactor to find out more about Fraud And Risk.


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