Papering Over the Cracks

[Editor’s note: This is a blog post from Validis. Validis is a Silver Sponsor at LendIt Europe 2017, which will take place on October 9-10, 2017 in London.]

Why financial information fraud is still an issue and how lenders can use technology to identify it

As we approach LendIt 2017, it’s clear to see how much the SME lending market has progressed over the last year. In fact, it is positively booming. Initiatives like the Bank Referral Scheme and deals made this year between the government and some of the UK’s largest banks to ramp up support to SMEs mean they are finally, after being so neglected post-2008, getting the financial support they need to thrive.

Because of this progression, the regulatory spotlight is continuously directed at lending institutions and rightly so. In 2016 there were a reported 5.4 million SMEs in operation in the UK alone and our economy depends heavily on the success of these “little guys”.

We know that lenders have a responsibility to lend fairly, but in an ever-changing market they also have a responsibility to protect themselves, a feat which is becoming more and more difficult as the rate of lending increases exponentially due to digital advances that have enhanced the industry in so many ways.

Fintechs and banks are now lending faster than the speed of light, but when it comes to uncovering fraudulent activity, are they actually left standing in the dark?

Paper fraud and alteration of financial information that is submitted by SMEs continues to plague lenders, mainly because it’s difficult to trace and quantify. Traditionally SME borrowers provide lenders with paper, Excel and PDF copies of their financial information, and there are no methods to qualify the validity or accuracy of the information. Often information is compiled manually and is often incorrect, incomplete or, at worst, changed to hide weaknesses in the financials.

Invoice finance lenders have to be particularly vigilant when it comes to a different type of fraud: fresh air invoicing. Although much effort has been made to clamp down on this kind of counterfeit invoicing, the security measures and processes put in place to try and identify fraudulent information were, up until recently, manual and not entirely foolproof. The fact is, fresh air invoicing is still a risk and banks and alternative finance providers must be careful about advancing money against this worthless security.

Although with this kind of fraud it’s not noticeably large sums of money that are falsified, it’s still an issue. If you punch enough small holes in the debtor book of a big ship, eventually it will sink.

The digital solution…

Fortunately, FinTech products targeted at eliminating these pain points have recently come to market and now lenders are provided with real intelligence into where and when this type of fraud exists.

One way to avoid being stung by paper fraud is to lend against accurate financial data extracted directly from a company’s accounting package, rather than lending against a PDF or excel file that can be amended. Advances in technology means lenders are now able to access this level of data directly, securely and efficiently, so they can be sure they’re providing fair financial support to loan applicants. Some products also incorporate fraud detection tools which spot when an entity may have created a fake invoice by identifying the warning signs: duplicate invoice numbers, rounded invoice values and duplicate invoice values.

One of those products is Validis:

• Validis connects directly to all major SME accounting packages and enables them to share their accounting information with a lender easily and securely. Because the data is extracted from the SME’s source accounting software, lenders can be confident that they’re underwriting loans against accurate and reliable financial information. In other words, Validis provides an unprecedented level of transparency to lenders, mitigating risk by placing them in the seat of the SME’s CFO.

• Validis has inbuilt fraud detection tools that highlight anomalies, discrepancies and mistakes caused by duplicate information. With the standardised data set that Validis provides, Lenders can easily spot and identify holes, spikes and unusual trends in the figures of an SME.

• Validis has a unique ‘Quality Score’ algorithm that assesses a company’s financial health and enables lenders to continuously monitor this so they can continue to lend with confidence.

Come and meet us at stand 214 to find out more.

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