Fraud’s impact on collections and recoveries

14th April 2022

It seems that hardly a day passes without another frightening statistic appearing in the press detailing fraud losses by government, individuals or businesses.

The scale of the problem (and the inadequacy of the resources devoted to combatting it) is routinely described as mind-boggling, staggering and a host of similar adjectives.  Fraud is clearly not going away any time soon and the costs to us as consumers (higher bills, more taxes) will only rise unless we can find better ways to prevent and undo the harm these criminals cause.

Much of the reporting has, understandably, focused on Third-Party Fraud where an individual or business has been targeted by unscrupulous players and robbed of their savings or income.  This fraud, however, represents just the tip of the iceberg according to most industry commentators as is demonstrated by a 2019 report by WPI Economics for CIFAS (Tackling first-party fraud) which stated:

“….publicly-available estimates of the cost of first-party fraud are likely to be significant underestimates of its true cost. But it is clear that even a conservative estimate of the total cost of first-party fraud to the UK runs into the billions of pounds.”

It seems likely that it accounts for between £1 billion and £2 billion each year in the UK alone and is undoubtedly costing all of us maybe as much as 25 basis points on our borrowings not to mention the risks that it is funding organised crime and terrorism.

No one solution can combat fraud across all its topologies, not least because fraudsters adapt to new threats and opportunities.  The solutions need to incorporate not just the front-end detection and prevention with robust Know Your Customer (KYC) protocols but also the back-end analysis and remediation.

It is this latter element that has been neglected in much that has been tried to date.  Once it has been decided to take the hit on a book of outstanding credit the appetite for ‘looking back’ diminishes and the focus returns, naturally, to business development and loss prevention.  This misses a trick in that it leaves behind a potentially valuable repository of data as well as some collectable debts.

There are some efforts being made more recently to deal with this after-the-event analysis and recovery and, it has to be said, with some encouraging results.

As a company (KM2 Ethical Finance), we have already tackled charged-off books for clients in the payday loans and rent-to-buy sectors using analytics and our own brand of collections using Contextual Evaluation Theory™, or CET for short.  This has yielded cash returns of up to 12% on some very challenging books where all hope had long since been abandoned and it has generated the seeds of some interesting data analytics that could help inform the front-end account onboarding defences.

This concept has taken years to come to fruition, but we can now say with confidence that almost any parcel of charged-off debts can be put through our analytics at speed and in significant volumes to generate a prioritised list of accounts where recoveries can be predicted with a degree of certainty.  As we gather more of this data, we will be able to assist institutions from a variety of sectors with their account onboarding and monitoring to reduce their exposure to first-party fraud.

This is not the silver bullet to fraud detection and prevention, but it does appear to be plugging a gap that has languished for too long and to that end, it is a welcome addition to the armoury of those tackling fraud in all its incarnations.

We are confident enough in our own ability to recover meaningful sums from debts that have been written off, be that from consumer debt portfolios or government Covid bounce-back loans. As a company, we hope we can help to reduce the cost of credit for the law-abiding amongst us.

Chris Metalle, Chief Financial Officer at KM2 Ethical Finance