Tech savvy manufacturers set for £13bn boost as they cut out wholesalers and shops to sell direct to consumers

Entrepreneurial British manufacturers are expected to benefit from a massive £13bn boost as they increasingly cut out retailers and wholesalers and sell their products direct to consumers in one of the biggest shake-ups the industry has seen in generations, according to a new Barclays Corporate Banking Manufacturing report, Going direct: Is direct to consumer selling set to revolutionise the manufacturing sector?

The traditional model of selling goods via wholesalers and retailers is under pressure like never before, as companies embrace technology to sell and distribute their own goods via social media and the internet.

Nearly three out of four companies now sell direct to consumers (73%) and over the last five years, (DTC) sales have soared by 55%. DTC now accounts for 16% of all manufacturing sales in the UK, an in-depth industry survey of 500 manufacturing companies found.

Manufacturers who have invested in a DTC sales strategy said they had benefited from increased revenue (45%), growth in their customer base (38%) and increased speed to market (32%).

Sportswear giant Nike became the latest big brand to launch their own direct sales channel last year, ‘Nike Direct’, whereas start-ups such as Eve Mattresses and Harrys razors began as DTC brands and have now expanded into selling into shops.

The value of goods sold through DTC is forecast to continue to expand rapidly as both well-established global brands and start-ups invest in the potential around selling direct to customers.

Economic modelling commissioned by Barclays – which analysed current growth rates, customer demand and investment in DTC channels – estimates that value of the DTC market will boom to £13bn by 2025. Beyond the manufacturing sector, DTC activity could also provide a much needed boost to the wider UK economy by up to £32.5bn in the next five years.

Lee Collinson, head of manufacturing at Barclays, comments:

“The rise in businesses selling direct to customers is one of the biggest changes the manufacturing industry has seen in generations. As companies go it alone, bypassing wholesalers and retailers, they are increasingly embracing social media and digital channels to advertise and sell their products direct from the factory, and then managing the sales, distribution and after-care themselves.

“It’s a massive shift and the rewards are potentially huge, with nearly half of companies selling DTC reporting an increase in revenues as a result, along with a bigger customer base and the ability to personalise products.

“Wholesalers and retailers are aware of the challenge and will need to continue to find ways to adapt and flex their approach. DTC comes with its own challenges and requires investment in services, training and IT. The future is likely to involve a mix of DTC, wholesale and retail and there will still be a role for all three channels.”

The role of technology

Technology has been a key driver in the adoption of DTC with nearly all manufacturers (96%) now selling directly through their own websites. Social media is also of increasing importance to manufacturers with over three-quarters (79%) currently using or planning to sell via Facebook and nearly three-quarters (72%) currently using or planning to sell via Instagram. This comes as over half of manufacturers (58%) plan to digitalise their distribution processes in the next five years.

Disruption to the retail model

Manufacturers are increasingly confident about the potential DTC represents with almost three quarters (72%) agreeing that selling direct to consumers cuts out the middleman and is good news for both consumers and manufacturers.

Challenge to manufacturers going on their own

Adopting a DTC strategy does not come without its challenges. One in five (21%) companies said they had not launched a DTC channel because they feared the impact it would have on their relationship with wholesalers, with a similar number (19%) concerned about the response from retailers.

Businesses that also increase their responsibility for distributing products cite a number of new challenges with this approach, including building brand loyalty (41%), having increased responsibility for every touchpoint within the supply chain (32%) as well as managing customer interaction (31%).

Working together to fight cheque fraud

The third white paper written by the TALL Group of Companies

Fraud: A changing landscape

In terms of recent history, cheque fraud losses peaked in 2008 and during the following 10 years they reduced by more than 85%, far in excess of the decline in cheque volumes over the same period. However, the latest statistics published earlier this year have revealed that cheque fraud losses have increased throughout 2018.

According to “UK Finance Fraud the Facts 2019, cheque fraud losses increased to £20.6m last year – the first rise in cheque fraud reported in seven years. The volume of fraudulent cheques increased by only a limited amount, indicating that a small number of high-value fraudulent transactions led to the rise in losses last year, rather than any change to the longer-term trend.

A total of £218.2m of cheque fraud was prevented in 2018, up by 3% on 2017. This is equivalent to £9.14 in every £10 of attempted cheque fraud being stopped before a loss occurs. This remains the highest proportion of attempted fraud prevented across all types of payment fraud.

There are three main types of cheque fraud:

• Counterfeit – a cheque that has been created on non-bank paper to look genuine. It relates to a genuine account, but has actually been created and written by a fraudster for the purposes of committing fraud.
• Forgery – a genuine cheque, however the signature is not that of the account holder. The fraudster has forged the signature by signing the cheque themselves.
• Fraudulently altered – a genuine cheque made out by the genuine customer but it has been altered by a fraudster before it has been paid in (e.g. by altering the recipient’s name on the cheque or the amount. It is no longer a genuine cheque).

Of the total £20.6m lost to cheque fraud in 2018, counterfeit cheques accounted for £15.9m, forged items resulted in a £3.4m loss, and fraudulently altered accounted for £1.2m.

As expected, fundamental change to the cheque clearing system – the introduction of the Image Clearing System (ICS) in October 2017 – has inevitably attracted more attempts of fraud, as criminals pro-actively look for any weak links in the new cheque image clearing system.

The implications of ICS

Whilst cheque volumes continue to decline in the UK – at around 15% per annum – the payment method still plays an important role for many sectors, organisations and individuals alike, with more than one million issued every day.

As detailed in our first white paper of 2019, “Fighting Cheque Fraud in the 21st Century: Cheque Fraud Detection in the New Clearing Model”, the UK banking industry has been delivering the digitisation of the paper cheque and the roll-out of the ICS has recently been completed. All cheques now benefit by reduced clearing times to the next working day following the cheque being banked on Day 1. New methods for paying cheques into your bank account are being introduced, such as capture on your smartphone and remote deposit for businesses using desktop cheque scanners. Subsequently, there is a faster clearing period with value credited and certainty of fate known by the end of Day 2, whilst you are now no longer required to visit your bank or pay in at your local post office. The cheque has finally become part of the 21st century technology revolution.

Commenting in October 2017, at the launch of ICS, Martin Ruda, group managing director at the TALL Group of Companies, had said: “The digitisation of cheques has proven to be very effective across numerous countries for many years, and the long-awaited introduction of ICS is a significant event as the UK follows suit. With an emphasis on speed and convenience, we encourage banks and building societies to fully embrace the modernisation of the cheque clearing process, which will lead to increased efficiencies for the financial organisations as well as their valued customers.”

Fraud liability model and secondary legislation

Currently, in the event of losses, direct participants are bound by the ICS Rules for compensation in cases of fraud with the paying bank typically compensating the customer for the loss albeit the payee’s bank, or the collecting bank (if different to the payee’s bank) can compensate the customer depending upon the circumstances surrounding the loss.

Last year, the government introduced secondary legislation to provide a safety net in respect of compensation for losses suffered by users of cheques to ensure the innocent customer, particularly the payer of the cheque, should not be left out of pocket.

Where a cheque is lost or stolen from a payer and collected by a fraudster, the banker who has provided the facilities for the image to be captured from the original cheque, normally the payee bank, is deemed the responsible banker, and is liable to make full compensation to the payer or paying bank, irrespective of fault. Compensation is excluded in those cases where the payer has been grossly negligent or been knowingly involved in fraudulent activity.
This ‘re-balancing’ of the fraud liability model is recognised as a fair and reasonable step to mitigate risk and is a further change to ensure all parties to the cheque image clearing process contribute to its integrity and reliability.

Developments in technolog

Innovative anti-fraudulent solutions

The introduction of ICS has given the wider industry the opportunity to innovate and develop new and highly sophisticated Image Survivable Features (ISFs) to help combat fraudsters, many of which were discussed in-depth within our second white paper, “Cheque Image Clearing System: An Innovative Approach To Defeating Cheque Fraud”. These solutions have been designed to protect financial organisations and their customers from any attempted fraudulent activity as they adapt to the new processes that form part of the new clearing model.

The introduction of scanner-based features at the point of collection, including the use of ultraviolet (UV) image capture and alteration detection, and the application of Image Quality Assessment (IQA) routines, can flag items that are not imaging correctly, or which may have fraudulent history (wrong size, shape, information). This will prevent the collecting bank from submitting fraudulent and non-standard items into the central clearing system.

This is being supplemented by the use and gradual adoption by banks and their customers of the new and enhanced ISFs – which include UCN and UCN Plus® to very specifically trap counterfeit, tampered and fraudulently altered items. In particular, UCN Plus® enables the original variable data applied to the cheque – payee name, amount, date – to be automatically matched against the actual content which appears on the image once the cheque has been deposited, and before the funds are cleared.

Impacting figures

Encouragingly, these solutions are also having a positive effect on the level of fraud being detected. For instance, modern technology has now evolved to identify alterations, counterfeits and forgery, in addition to the traditional security features on the cheque, which has reduced the reliance on human eye-balling. Whilst ISFs are becoming increasingly important to confirm the cheque payment details, these sophisticated solutions are underpinning the strong and well-established fraud prevention measures used within the industry for many years.

Collaboration is key

In order to fight fraud in the most proficient manner, it is vital for all participants involved in the transaction process (collecting bank, the payee bank and the paying bank) have to accept they have a duty of care to check for poor image quality and to identify fraud. Similarly, indirect participants (agencies) also have that obligation where they assume any of the roles within the transaction.

With the introduction of ICS, the collection participant is now the only one that has sight of and can feel the paper and check the paper security features, and it is most important that this task is fulfilled in the most effective manner.

The image, once captured, must be clearly readable thereby enabling the paying participant to undertake their own specific checks. If that particular organisation is unable to read the image clearly, then the paying participant will not pay the cheque, resulting in the item being represented. This will lead to all parties having to undertake additional work, frustrating delays to the beneficiary in receiving the funds, as well as negatively impacting the reputation of ICS.

With the completion of cheque imaging in the UK, the transfer of the paper document from one bank to another has now become a thing of the past, and now the UK cheque industry looks to its technology service providers for innovation, quality assurance and protection from fraud. Early evidence suggests it will not be disappointed.

Banking in the future

Over the past decade, banking apps on smartphones have given people the freedom to manage their finances when and how they want. But even bigger benefits are just around the corner.

In the next 10 years new technology will offer customers personalised financial support, instant home-buying decisions and even tougher cybersecurity.

A key factor driving change is the fact that artificial intelligence is coming of age. Automatic programs are already able to carry out complex tasks, such as fielding customer queries, more quickly and accurately than ever. At the same time, advances in data storage are unlocking the power of “big data”, giving these programs the ability to analyse vast amounts of information.

In the future, customers will be able to ask banks to analyse their spending patterns and give them tailored recommendations on investing and saving. Banks could also offer hints on decisions such as switching utility provider to save money – or even switch automatically on a customer’s behalf if they prefer.

Mobile banking services could also incorporate new technologies such as augmented reality and voice activation. Imagine looking for a new home: you point your phone at the house of your dreams and talk directly into your banking app. Your bank could tell you not only how much your monthly mortgage repayments might be but also, by drawing from public information, details about local services and taxes.

Technology is also opening up new ways of keeping people and the financial system safe. Automated programs are already capable of carrying out security checks speedily and accurately, helping spot criminal activity and combat fraud. Such tools are likely to become even smarter and more widely used in future.

And in the area of data privacy, banks are investing heavily in technology to help customers keep their personal information secure, including fingerprint or face recognition. As people’s digital identities become increasingly important, the role of banks could expand to include helping customers prove who they are safely to other organisations online.

These advances make it an exciting time to be in financial services. It is no surprise that new competitors are keen to enter the market. But while digital technology is transforming the industry, it takes much more than just tech to succeed in banking.

“It takes much more than just tech to succeed”

That’s a message reinforced by Banking of the Future, a report written for HSBC by academic and fintech expert Dr Markos Zachariadis.

At its heart, banking is based on trust. While customers often want banking services to be modern and responsive, they also want to be certain that their money and their information are safe. And they want banks to help them make informed and appropriate decisions. It is vital that automated programs do not encourage people to take on debts they cannot repay, for example, or make investments that do not meet their needs.

Financial services providers must demonstrate they are using new technologies such as artificial intelligence and big data in an ethical way. As well as securing the consent of their regulators and investors, it is important they communicate clearly with customers and give them meaningful choices about the use of their information.

And while customers increasingly use digital channels to manage their finance – with 87% of HSBC retail transactions now taking place via mobile or online – many people still want and need personal advice for their most complex and sensitive financial decisions.

Technology has the potential to offer unprecedented speed and convenience in banking. But the banks who thrive in the future will be those who match great tech with thoughtful risk management and, above all, excellent customer experiences.