Banks that would like to build better relationships with their commercial clients should spearhead efforts on the part of those clients to automate their B2B payments. Not only do banks benefit by helping their clients improve cash flows and improve credit worthiness with their vendors, the use of an automated B2B payment system can significantly reduce the possibility of fraudulent transactions, which helps both the bank and its clients better manage risk.
The Federal Reserve Board’s 2013 Payment Studies white paper notes that third-party fraud is significantly higher when businesses or individuals use credit or debit cards for bill payments than it is when they utilize ACH transfers. According to the Fed, the fraud rate for credit and debit cards is $3.60 per $10,000 spent, compared to the ACH rate of less than $1. Many banks provide their small business accounts with a business MasterCard or VISA which is then used to make purchases. The use of a credit card creates risk for both the business and the bank. For the sole proprietor or small partnership, the company credit card presents ample opportunity for fraud. One partner – or employee – who may have access but not authorization uses the card for a handful of non-business purchases. There may not be a clear purchasing policy in place for credit card transactions, and receipts often are misplaced. The credit card statement comes in during the next month. Unless the payer is vigilant in tracing every purchase to its origination, it’s quite easy to pass along a few personal purchases This is especially true of those purchases were made using existing vendors. For example, one firm that provided limited oversight on credit card access and purchases paid for several hundred dollars’ worth of Starbucks ground coffee for one employee’s household. Rather than going through the purchasing protocols for nonproductive purchases, the employee continually volunteered to run to the “big box” office supply store for specialty paper and supplies used in her department. The coffee purchases were buried in with the other items and the receipts scanned perfunctorily, approved and coded by the comptroller. During a major construction project, the same firm paid for several thousand dollars’ worth of building supplies purchased on a credit card from another “big box” store for which the receipts were said to be lost.
An automated B2B system actually builds better fraud prevention controls into the accounting process. The automated payment system is integrated into existing enterprise or accounting software. That means that the process of building a new vendor, entering an invoice to that vendor for payment and ultimately issuing payment are controlled by the purchase order system that is in place. For an invoice to be approved for payment it would have to be matched to a purchase order, and a packing list or receiving document matched to the invoice. Although it is possible for a dishonest accounts payable staffer to create one or more fraudulent vendors, there would have to be some level of collusion with purchasing in order to create a purchase order for services issued to the vendor and then to receive and approve a fraudulent invoice. In a worst-case scenario, there would be a single person who builds vendors, issues purchase orders, receives and approves invoices and issues payment for the invoices. However, even in this case there would be an audit trail built in the computer system that, if tracked forensically, would uncover the identity of the person through the computer‘s IP address and their logon credentials.
Moreover, the final step during which payments are issued are completed by a person charged with access to the bank account. This individual’s computer also has a security key, which is a tiny bit of code not unlike a “cookie” that can also be used to identify personnel involved if a payment issued is deemed fraudulent.
The automated B2B payment system provides significant risk management advantages over the use of credit cards for making business purchases. The banking professional who wants to enhance his or her relationships with commercial clients should encourage the use of an electronic payment system. Not only will the client reap cost savings through streamlining the payables process, they will also reduce shrinkage losses and build an audit-worthy accounting system.