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Fraud Costs Are Climbing

September 27 — A new study from LexisNexis, 2018 True Cost of Fraud, found that for every dollar of fraud, financial services companies incur $2.92 in costs, up from $2.67 in 2017, representing a 9.3 percent year-over-year increase. The lost value of the transaction, plus fees and interest incurred during applications/underwriting/processing stages, labor costs for fraud investigation, fines and legal fees, as well as external recovery expenses are the main costs of fraud for financial institutions.

Based on a comprehensive survey of 175 risk and fraud executives in financial services companies, including retail and commercial banks, credit unions, investments, trusts and wealth management, the study evaluates how to navigate and mitigate the growing risks of fraud, while highlighting the areas where financial institutions can seek improvement in their fraud protocols.

Fraud costs continue to be higher for mid- to large-sized digital firms, particularly with international transactions. The study showed that, for such firms, every dollar of fraud results in $3.27 of fraud costs. They also see fraud expenses eat away at 2.41 percent of their total revenue, compared with fraud expenses equaling 1.83 percent of the revenue of mid- to large-digital banks that do not operate internationally. This highlights the risk that the anonymous remote channel adds to financial transactions.

“Continuing the trend of prior years, the cost of fraud continues to rise for global financial institutions,” said Kimberly Sutherland, senior director, fraud and identity management strategy for LexisNexis. “Particularly in the digital and international transaction spaces, while these firms are working to combat fraud, they are not doing so in the most optimal way. Fraudsters continuously test for the weakest entry point in the financial transaction system, and these institutions should apply a multi-layered approach to fraud prevention to combat this growing issue.”

Other key findings of the study include:

  • The level of fraud as a percentage of revenues has increased, from .95 percent in 2017 to 1.53 percent, on average, in 2018.
  • Identity fraud, including synthetic identity fraud, remains a significant issue for financial services firms, particularly in larger banks with more than $50 million in revenue. Sixty-one percent of fraud losses for these banks stem from identity fraud. Twenty percent of the identity fraud incurred by these larger banks is synthetic identity fraud.
  • Based on the survey of executives, the three most pressing online fraud challenges for mid- to large-sized banks are: verification of customer identity (KYC/AML); email or device verification; and delay in transaction confirmation.
  • Financial services firms that track fraud costs by both channel and payment method experience lower fraud costs, seeing $2.52 per dollar of fraud compared $3.11 per dollar of fraud for those that only track via one experience. Large digital firms are most likely to track fraud costs by both channel and payment method, while mid-sized firms with revenues of $10 million to $50 million still lag behind.
  • Financial services firms that use a multi-layered solution approach experience fewer false positives and a lower overall cost of fraud.

“The growth of new digital and mobile channels, and the increased fraud that comes with them, means that financial institutions must find the right approach to deal with this issue,” said Sutherland. “For identity and transaction-related fraud, having a multi-layered risk model in place will lead to lower fraud costs. There is no one-size-fits-all solution to fraud and having a strong detection and prevention system in place decreases the likelihood of customer friction and lost current and future business.”

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