How is Generative AI transforming due diligence in the Retail Sector?
India’s retail sector is a cornerstone of its economy, significantly contributing around 10% of the country’s GDP and being the world’s fifth-largest global destination in the retail space. Despite its economic significance, the sector grapples with recurring incidents of fraud and failures involving employees and third parties.
Retail space is prone to fraudulent and deceptive activities as it gives more room for practices such as shoplifting, theft, credit defaults, fake documents/bills, refund fraud, inventory shrinkage, etc. The annual report, compiled by Forrester Consulting, indicates that the cost of fraud is nearly 4 times the actual amount lost in fraudulent transactions.
These costs include not only direct financial losses but also internal labour expenses, external costs, recovery charges, and replacing or redistributing lost or stolen items. Moreover, beyond financial implications, such incidents also erode the integrity of the businesses.
Retail Industry: Bad Actors and Frauds
Robust due diligence is quintessential in retail as multiple frauds can be perpetrated by a variety of actors – some are internal and some are external. Internal threats can be dishonest employees who can commit theft of cash or merchandise, manipulate refunds or collude with external stakeholders. For instance, an inventory manager might conspire with a shoplifter for mutual gains.
In some cases, frauds are committed by third parties in the retail supply chain. This could involve counterfeiting bills/invoices, delivering poor-quality goods, engaging in bribery or targeting high-value SKUs. Given the diverse types of fraud and actors involved throughout the supply chain, the role of robust due diligence remains indispensable.
Challenges of Due Diligence in Indian Retail: A Deeper Dive
- Manual Processes: Reviewing paper records and manually assessing the gaps and errors are slow and error-prone. Without robust due diligence solutions, companies struggle to identify complex fraudulent activities and behaviours.
- Complex Regulatory Environment: India’s retail sector has a complex web of regulations covering licensing, taxation, and labour laws. Retail businesses must ensure compliance with these regulations to avoid legal issues and fines.
- Financial Health: Limited access to reliable financial data, especially for smaller retailers, can make due diligence challenging. Thorough financial due diligence is crucial to assess the target company’s financial stability and identify potential risks like hidden debts or unsustainable business practices.
- Supply Chain Management: Fraud can occur anywhere in the supply chain, from manipulation of invoices by suppliers to collusion between employees and external actors for theft or product substitution. Implementing a comprehensive end-to-end due diligence system – from document collection to contract management to continuous monitoring and leveraging GenAI, is a must to assess the integrity of all partners in the supply chain. Otherwise, it can be complex.
Generative AI: A Game Changer in Due Diligence
Increased Efficiency in Due Diligence: Gen AI is revolutionising traditional onboarding practices by automating the due diligence processes, extracting and analysing vast amounts of data from public records, financial statements, NIDs, and social media, and identifying potential conflicts, gaps and errors. This frees up human analysts to focus on more complex aspects of due diligence, such as contract negotiations and relationship building.
Leading companies like AuthBridge are at the forefront of leveraging Generative AI to streamline processes and carry out due diligence of bulk cases. With Gen AI, we can seamlessly handle over 10 million documents monthly where we use OCR technology to scan the images, pass the output stream to an LLM, extract the relevant fields via prompts and validate the authenticity with external/internal sources, all in under 5 seconds.
- Enhanced Risk Assessment: With GenAI in the picture, analyzing vast amounts of datasets from various sources to identify potential red flags is much more seamless. This could include uncovering negative press about vendors, suppliers, distributors etc. or identifying links to suspicious activities that might need attention.
GenAI models can be further trained to stay updated on ever-changing regulations relevant to the retail sector.
- Predictive Analytics: By analyzing historical data on past vendor performance and industry trends, GenAI can predict potential issues with future vendors. This allows businesses to prioritize due diligence efforts on higher-risk vendors. In addition to this, businesses can assign risk scores to third parties based on a variety of factors identified during due diligence.
- Improved Supply Chain Operations: Automating tasks and streamlining workflows with GenAI can significantly reduce the time and resources required for due diligence. This enables businesses with faster identification of potential risks and regulatory compliance issues, improving efficiency and accuracy in risk assessment.
What’s not to be missed is fraudsters are constantly adapting their tactics, using new technologies and exploiting vulnerabilities in systems. Due diligence procedures/systems must be constantly upgraded to stay ahead of these evolving threats.
While GenAI can automate tasks and identify patterns, human expertise is still essential for interpreting results, making complex decisions, and building partner relationships. Effective due diligence in retail requires a dynamic approach that adapts to evolving threats and leverages technology like GenAI. GenAI is most effective when combined with human expertise and ongoing training. This combination can be a game-changer, leading to a more robust and secure supply chain.
Original article published here.
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