Point of view: Businesses experiencing a sharp spike in fraud

This is according to recent data, quarterly credit application data, conducted by Debtsource. File photo.

This is according to recent data, quarterly credit application data, conducted by Debtsource. File photo.

Published Apr 7, 2024


There is a notable increase in fraudulent activities in the business sector during the transition from the second quarter to the third quarter of 2023.

This is according to recent quarterly credit application data, conducted by Debtsource which found that this surge in fraud poses a critical challenge for businesses navigating through the tough times.

According to the data, there was a significant increase in the value of fraudulent applications which led to businesses finding it hard to navigate the ever-evolving financial environments.

The data revealed that the context is that companies now rely more heavily on supplier credit facilities than ever as their prime form of business lending due to a decrease in available bank funding.

Debtsource CEO Frank Knight said longer supply chain delays in shipping, harbour, and rail networks have placed additional strain on company cash flows, forcing businesses to access second-tier financing options such as invoice discounting or supply chain finance.

“However, these are typically at much higher rates than traditional bank funding, adding further pressure to profitability and cash flows.

“Lenders, in response to the heightened interest rate environment, have adopted a more cautious stance, evident in their reduced risk appetite for traditional unsecured products. This caution translated into offering smaller average loan amounts and imposing limits on new revolving products,” said Knight.

The data said this results in greater reliance on supplier credit facilities, and that lenders are bearing a heightened risk of increased fraud. The persistent emergence of commercial identity theft and scam operations prompts weekly alerts from trade credit insurance companies, urging credit providers to heighten their vigilance.

“Consequently, decision-making processes are slowed down as meticulous scrutiny becomes necessary for both new and existing applications or orders. Businesses now rely on stricter credit policies and delve deeper into the backgrounds of potential credit recipients to safeguard themselves,” it said.

Knight said according to the Q4 2023 TransUnion Consumer Pulse Survey, digital fraud, and personal data security are major concerns for businesses, as 28% of respondents were targeted by fraud schemes in the prior three months, with 10% falling victim.

“In Experian’s latest fraud report, 73% of businesses in the survey saw their fraud losses increase in the past 12 months. Fraud schemes typically involve phishing, smishing (fraudulently soliciting information via SMS), and money/gift cards, with businesses more at risk in the event of employees falling prey to such schemes.

“The balance between fraud attacks and prevention is highly dynamic, and the only way to stay ahead of fraudsters is to take advantage of the latest fraud detection technology,” said Knight.

He said this highlights the need for better data security measures and more secure digital environments by suppliers.

“Recent regulatory changes have had a profound impact on commercial credit transactions. Credit providers are now required to register and adhere to the new Financial Intelligence Centre Act (FICA) regulations. This entails not only FIC registration but also the identification of beneficial ownership and rigorous Know Your Customer (KYC) procedures. Consequently, the process of opening new accounts has become more intricate, necessitating adjustments to credit policies, applications, and the reporting of cash transactions exceeding the specified threshold.”

The financial stress these factors place on businesses is evident in the rising rate of delinquencies, with Debtsource statistics showing a 33% increase since the start of the current interest rate hiking cycle, he said.

“There is a direct correlation between higher interest rates and increased delinquencies in trade credit because more companies go out of business when interest rates increase,” said Knight.

According to Knight, while the latest liquidation data released by Statistics South Africa on November 27, 2023, paints a different picture, with the total number of liquidations decreasing by 13.4% between October 2022 and 2023, Knight cautions that this rosy statistic overlooks a crucial trend. “The conventional focus on liquidation statistics as a bellwether for the business sector’s overall health does not account for the fact that companies are increasingly opting for business rescue instead of succumbing to outright liquidation,” he said.

While providing a lifeline to struggling businesses, Knight says this shift in strategy conceals the gravity of the financial distress in the market, with Debtsource witnessing a 26% year-on-year increase in business rescues.

“Our records indicate that companies that go into business rescue remain there for longer, which simply means that liquidation stats have a lag effect. Artificial intelligence (AI) is starting to play a significant role as a fraud detection tool in the trade credit sector,” said Knight.

“With one in every 300 credit applications processed by Debtsource including some element of fraud, we constantly refine our models to better detect low-, medium- and high-risk applications,” he said.