Three Ways Automation Can Protect Dealerships Against Payment Fraud

Good news: The 2022 Payments Fraud and Control Survey found the lowest levels of payment fraud in U.S. organizations since 2014.

Bad news: 71% of the 550 organizations surveyed experienced fraud. That’s not a low number, especially if your organization is among the 71 out of 100 that fell victim. According to the survey, checks and ACH debits were the payment methods most impacted by fraud in 2021, with 66% of those surveyed saying they’d experienced check fraud and 37%t saying they’d experienced ACH fraud.

Clearly, businesses are fighting a losing battle against payment fraud. That’s especially true in industries where checks are still the predominant way to pay vendors, such as the auto dealership industry. Implementing payment automation technology is a powerful way for dealerships to fight back while simultaneously making the back office more efficient.

Check fraud is on the rise

At this point, there’s really no reason to keep writing checks, except that’s the way it has been done for decades. Even older generations are writing far fewer checks in their personal lives. Yet during COVID, when doing check runs became more inefficient than ever, even large dealership groups clung to that process.

Now they’re being exposed to a new wave of check fraud powered by underground crime communities on the internet. The Inspector General for the U.S. Postal Service reported that mail theft complaints increased 161% from March 2020 to February 2021. Criminals are finding ready markets for stolen checks online, where they can also purchase master keys stolen from postal carriers, share tips, and post photos and videos of their exploits.

That’s consistent with what we’re seeing and hearing in our conversations with dealerships: reports of checks stolen out of the dealership’s mailbox, and off of employees’ desks. It’s gotten so bad that American Banker reports banks are having trouble collecting on bad checks from other banks.

Dealerships are being targeted

Dealerships are vulnerable because they have always suffered from weak internal controls and the lack of duty segregation. In an ideal manual payment process, there should be one person who writes the checks, a different person who signs them, and then a third person who reconciles the accounts – ideally someone outside the store such as a CPA or auditor. The dealer or the GM should also be doing spot checks by– opening the bank statements, reviewing the bank statements online, and looking at cleared checks.

Even though this is all part of NADA training and manufacturer training, it is rarely implemented. Of the thousands of dealerships we’ve worked with in our careers, we’ve seen just a handful with proper segregation of duties. But even with segregation of duties, you still have checks and check stock floating around the dealership where they can be easily stolen or even just photographed and replicated on a good home printer. In most dealerships, they’re just relying on everyone to be honest.

Those dealerships that did start paying some of their vendors by ACH are now contending with a rise in ACH fraud as well. According to the FBI, losses from business email compromise (BEC), the most common ACH theft tactic, have surpassed $43 billion globally. There has been an increase of 65% between 2019 and 2021. Again, most dealerships are vulnerable because they do not have airtight controls for securing vendor banking data or for handling requests for changes to bank account data.

Reducing fraud exposure

Outsourcing to a vendor payment automator eliminates fraud exposure in three ways:

First, separation of duties is a system requirement so clear tasks and controls are built right into the technology. Approvals and check signing cannot be done by the same person. They are configurable so those duties can be separated, and everything can be done remotely. Checks do not need to be walked around the dealership or left on people’s desks. The payment company prints and mails all the checks, so there is no check stock or mail to be stolen.

Second, the payments provider collects all the vendor data, stores it securely in the cloud, and updates it continuously. Any time there is an incoming request to change a banking account number, it must go through a rigorous validation process using both technology and humans to confirm the request is legitimate.

Today’s fintech payment providers can do this at scale because they are built around large proprietary vendor networks (over 850,000 vendors in the case of Corpay) that are already enabled for ACH and virtual card payments. By connecting into the network, customers can typically move about 80% of their vendor payments onto one of these electronic payment methods without any enablement effort on their part.

Thirdly, there’s an opportunity to pay 20-30% of your vendors by virtual card– the most secure method of payment. It’s not uncommon for dealerships to pay some of their vendors by card, but that is often done by reading the number on a plastic card over the phone, or by having a card on file with a vendor. Needless to say, this is also a fraud risk.

Check alternatives

Virtual cards consist of a unique 16-digit number associated with a vendor name, merchant code, and exact payment amount. They cannot be used in any other way. They are extremely difficult to steal, and not as appealing to thieves because it’s a one-off. Stealing a pile of checks or a bunch of email addresses to phish for a big payday has a better ROI. Cybercriminals appreciate scalability and ROI as much as legitimate business people.

Virtual cards do have one similarity with plastic cards: you get rebates on your payments. When you leverage a vendor payment network to pay a greater percentage of vendors virtually, the rebates can really add up over time.

Controls are hard for many industries, not just auto dealerships. It’s never the fun or sexy part of the business, and it’s not a moneymaker. But the lack of controls can lead to significant losses impacting dozens or sometimes hundreds of people who are expecting to have that money in their bank accounts.

Today’s criminals use all the latest technology to their advantage, and they have the upper hand because theft is their sole focus. It’s hard for dealerships to fight back because their focus is selling cars. By outsourcing to a payment service provider, however, they gain a partner whose resources and dedication to preventing fraud are more than a match for fraudsters’ dedication to committing it.