The SME market is booming. Initiatives like the Bank Referral Scheme and deals made last 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. As lending rates continue to increase due to digital advances, this is becoming more and more difficult. FinTechs and banks are now lending faster than the speed of light, but when it comes to uncovering fraudulent activity, are they actually left in the dark?
Paper fraud and alteration of financial information 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 reality 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 a big ship’s debtor book, 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 have enabled lenders 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.