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Short-term lending, bad debt and an elephant called Fraud

Ryan Morrison, TruNarrative


Ryan Morrison; Chief Revenue Officer and Founding Director of TruNarrative


Recently I was asked to join a panel on fraud at last week’s Consumer Finance Association event held in Birmingham. Apart from seeing some old faces and making some new contacts it also produced some thought-provoking discussions, and for me personally, the issue of how fraud is perceived and dealt with in this sector stood out. For those of you at the event, you will have heard me challenge the sector on this topic, as there appears to be a lack of recognition in the industry right now of fraud (especially first party – more on that below!) as a genuine issue, or perhaps it is that fraud cannot be prioritised?

Without patronising anyone let’s just be sure we understand what we mean by “fraud” as I am referring to it. 1st Party fraud occurs when customers apply for credit with no intention of paying or change their intention of paying later in the relationship. 3rd party fraud is the one that gets all the media attention – identity theft, synthetic identities and account takeovers all fall in this category. According to recent data for the very first time “information thefts (are) overtaking the appropriation of physical assets (1)”.

In this year’s Fraudscape annual report Cifas stated that the highest ever number of identity fraud instances was recorded by Cifas members – 174,523 cases in 2017 alone (2). Similarly, 2nd party fraud (often referred to as “friendly fraud”) is also on the increase – this where the consumer knows, and often trusts the perpetrator of the crime. There is a great deal of noise in the media about fraud, and a great deal of consumer fear, but nevertheless the statistics do not lie, and the number of consumers falling prey to fraud is ever-increasing. The rise of data compromise is making this harder to detect with legacy identity and fraud systems, so companies have to look to more modern solutions to solve the problem.

Having recently reviewed a substantial amount of data across this sector, we know there is a real lack of fraud outcomes being recorded, which makes it almost impossible to put in place the right prevention strategy (which is why I also stated from the panel that for many, it is too early to start talking innovation – each company needs to understand the problem first!). To simplify the discussion a little, we can narrow it down to one main issue for a moment – bad debt vs fraud.



Why is the industry so keen to label fraud as bad debt?


Well, the reasons are threefold: firstly, bad debt can be written off as a loss against the balance sheet. Secondly, bad debt has sell-on value – once internal attempts to collect the debt are exhausted, that debt can then be sold to debt collection agencies. Also, it must be said that bad debt may sound a lot better than fraud – semantically speaking “bad debt” places the onus on the debtor, whereas fraud places it on the organisation (which is expected to take preventative actions).

One direct upshot of not recording fraud outcomes is that the solutions deployed to prevent fraud are unlikely to be fit for purpose.

Furthermore, labelling fraud as bad debt means lenders have no clear overview of just how much fraud is existent in their customer base, and thus where will the learning process come from? In a post-Wonga world industry players have plenty to worry about: the shadow of regulatory change is looming heavy, and the number of CMC driven compensation claims is at an all-time high. We understand why it may not sit as a priority, but at the same time all will recognise bad debt and affordability as major issues – they are intrinsically linked.


But how long can the issue of fraud be ignored for?

A layered, coherent and companywide strategy to prevent fraud at origination, and putting a stop to the mislabelling of it as bad debt will certainly pay dividends. Such a strategy, if effectively applied, will reduce the operational costs involved in trying to recover the unrecoverable, it will provide the required data and best practice needed to drive improved prevention, as well as going some way to boosting customer confidence. And this before we even consider the social and ethical implications of fraud.

Is the industry hiding from the real pain, or does it simply not have the time and resources to manage it? It may simply be the case that fraud is just not deemed to be a strategic priority.

We have built the TruNarrative platform to deal with these issues, but first we need to understand the problem statement – this we can help you with – contact me on 07393192420 or fill in this form and one of my team will be in touch


Stay tuned for Part 2 of the blog where we’ll discuss wider financial crime strategy in more depth.