Trade Credit

Understanding the role of fraud management in the trade credit process


The shift to e-commerce in B2B triggered by the COVID-19 pandemic has been accompanied by a growing quantity of fraudulent activity, which is causing great concern for many online sellers. In a recent webinar, Lucy Heavens, VP of Marketing at Hokodo, delved into the significance of fraud management and mitigation within the end-to-end trade credit process. The webinar featured Nicolas Rabinovitch, Director of Data Science and Fraud at Hokodo, who provides expert insights into the types of fraud occurring in the trade credit process and discusses strategies to mitigate these risks. This article summarises their discussion.

Types of fraud in the trade credit process

One of the most common types of B2B fraud highlighted by Nicolas is friendly fraud. In the context of trade credit, friendly fraud takes place when a buyer places an order and agrees to payment terms but then refuses to pay based on false claims that their order was never delivered or arrived in a poor condition. It can be difficult to identify friendly fraud because these buyers often have a good payment history and appear to be honest.

Friendly fraud is part of a wider group of fraud types known as abuse fraud. This group also includes first-party fraud, whereby a buyer uses their own identity or their own company details but has bad intentions.

“Bad intentions can be having no intention to pay back the credit they got access to, or it might be the act of raising a dispute with absolutely no ground for it,” explains Nicolas.

Impersonation fraud is another common form of fraud. The fraudster pretends to be working for a company and tries to place a purchase. According to Nicolas, this type of fraud is often more organised, while abuse fraud may be carried out by opportunists.

To address these risks, Hokodo employs sophisticated detection measures, including automated algorithms that assess both the willingness and intent to pay based on a variety of data points.

Reputation and revenue: the implications of fraud

During the webinar, Lucy cited a report that found organisations may lose around 7% of their annual turnover due to fraud. 

“One of the biggest financial risks that comes with fraud is that they tend to escalate quite quickly and exponentially. So once fraudsters find a process or control, something to exploit, that will double down very quickly and try to get as much value as possible,” Nicolas explains.

Beyond financial losses, fraud poses reputational damage to businesses. Impersonation fraud, where fraudsters pretend to be representatives of a company, can create distrust between buyers and sellers. Additionally, the strict controls implemented by businesses to combat fraud – especially those who have been burned in the past – may inadvertently affect genuine customers, leading to potential attrition.

Managing fraud: in-house vs. outsourcing

Merchants manage fraud risks differently, depending on their digitisation efforts and internal resources. Nicolas emphasised the need for businesses transitioning to digital trade credit management to reassess their controls and processes. However, this can be a significant investment. Outsourcing the credit management process to a specialised company that incorporates fraud assessment into its solution allows merchants to focus on their core operations while benefiting from a broader range of data sources and expertise.

The role of data in fraud checks

Hokodo conducts fraud checks at various stages of the trade credit process. These checks start with identifying a company and analysing public data, such as financial and director information. As the customer journey progresses, more data is gathered, including device information, email addresses and user behaviour during the checkout process.

“What we're trying to assess is, number one, whether this buyer genuinely intends to pay us back, and number two, whether this buyer has a relationship with the company from which it’s buying the goods,” says Nicolas. “From there we will make a decision as to whether we want to accept a given transaction, automatically reject it or challenge the customer with additional friction if we think the risk is medium to high.”

This data-driven approach optimises decision-making, maximising conversions while minimising risk.

Automating fraud prevention

Automating fraud prevention processes is crucial for efficient and scalable operations. Hokodo utilises techniques such as identity verification requests and open banking connections to validate the buyer's identity and establish trust. By leveraging open banking, customers can link their banking details to verify their association with the purchasing company. In some cases, accepting a transaction with minor doubts can be achieved by requesting a small upfront payment from the buyer.

The unique value of Hokodo's Digital Trade Credit solution

Hokodo stands out by leveraging a broad range of data sources, both internal and external, to effectively manage fraud risks. Our data-driven approach, coupled with expertise in data science and fraud, enables informed decision-making. Hokodo is an enabler for businesses, striving to understand their objectives and optimise the customer journey accordingly.

The webinar shed light on the significance of fraud prevention in the trade credit process. By understanding the types of fraud, implementing robust checks and continuously adapting to the ever-evolving nature of fraud, businesses can protect themselves from financial and reputational damage. Check out the webinar recording below to learn more.

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