Last week, we hosted the second installment in Vertical IQ’s free spring webinar series—a presentation entitled Save Me! Save Me Now! by small business banking expert Nick Miller, president of Clarity Advantage. Miller focused on smaller business’s fraud vulnerability—with an emphasis on red flags to look for with the way your banking clients are handling their payables and receivables—and strategies to help business owners reduce their vulnerability and losses.

An all-too-common crime

The top five frauds experienced by small businesses are:

  1. Payroll fraud, where employees misrepresent their time worked
  2. Cash theft by employees
  3. Online banking diversion, where employees scam accounts
  4. False invoicing, where employees create false vendors’ invoices to divert money to themselves
  5. Invoice emails, where a third-party poses as a vendor and sends a phony invoice for payment

Over 1 in 4 small businesses (those with fewer than 100 employees) will experience some type of fraud event, with a median loss of $200,000; more than half of those companies will never recover those losses.

Despite these staggering statistics, Miller pointed out that most business owners do nothing to protect themselves; they think fraud is something that happens to other people. And very few business owners think their own employees will defraud them; if they’re worried at all, they’re likely worried about unknown actors “out there.”

But the unfortunate reality is: Employee theft makes up a large majority of small business fraud—over 80 percent—with the average cash theft loss being $20,000. Much of that theft by “insiders”—78 percent—occurs via check payments fraud, and the typical scheme lasts 18 months—EIGHTEEN MONTHS!—before detection.

Additionally, 29 percent of small business frauds are committed by an owner—be it a business partner or perhaps a spouse or family member who is a co-owner. More than 40 percent of these losses were due to lack of effective internal control processes.

Starting the fraud conversation

How do you initiate an effective conversation with your business banking clients about fraud threats? And how can you as a banker help them mitigate their risks via better controls and bank services?

To start, Miller encouraged business bankers to commit the above fraud statistics to memory, use them when talking with clients, and share stories of business fraud their other banking clients may have unfortunately experienced. It really drives home the danger and the seriousness of the discussion.

A fraud prevention conversation with a client should focus on cash flow and should occur at least annually. Start with working capital and liquidity (Vertical IQ can help you learn about industry-specific patterns prior to your conversation). This can segue into a discussion about the processes the client’s or prospect’s company uses to manage and control their receipts, payments, and cash. In the webinar, Miller provided step-by-step talking points about how this conversation should go with both clients and prospects, and questions you might consider asking.

Miller then shared specific red flags to listen for in your client’s or prospect’s responses to your fraud-related cash flow questions. You want to consider vulnerabilities around the payment methods they are using, the people who have access to those payment methods, and the controls (or lack thereof) they have in place.

Best practices to help your business banking clients prevent fraud

The good news is that there are effective ways for businesses to guard against the threat of fraud. Miller’s list of best practices included:

  • Accounting oversight (checks and balances) and reconciliation
  • Adherence to control processes
  • Separating duties for payables and receivables
  • Making timely deposits (especially of cash and checks)
  • Controlling access to cash, checks, and accounting systems
  • Using a dual-approval process for payments, and monitoring check-signing authority
  • Using a PO system for vendors
  • Using fraud prevention bank technology like positive pay, blocks and filters, lock box, and bill pay

To see a full replay of this webinar, please email us.

Upcoming free webinar—Final installment in our 2019 Spring Webinar Series!

June 19, 2019 at noon EDTBuilding Prospecting Momentum

Banking industry sales expert Ned Miller will key in on which factors differentiate successful prospectors from less adept ones. Miller will help you assess your prospecting acumen and prioritize each day’s prospecting tasks. He will then build upon this momentum to show webinar participants how to leverage their prospecting network by integrating industry expertise into their prospecting process.

To sign up for our final free spring webinar, visit: our webinars.