Fraud is very much on the minds of finance companies nowadays. And for good reason, as LexisNexis Risk Solutions put a figure on how much fraud added to finance companies’ operational costs.
According to the study titled, “2017 True Cost of Fraud for Financial Services," LexisNexis Risk Solutions found that for every dollar of fraud, financial services companies incur $2.67 in costs, which includes chargebacks, fees, interest and labor, according to the LexisNexis Fraud Multiplier.
Based on a comprehensive survey of 185 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 the growing risks of fraud, while strengthening customer trust and loyalty.
A key finding from the study shows that digital channels increase the cost of fraud for financial services companies, if they are not managed effectively.
Analysts determined that mid-to-large digital financial services companies, which earn a minimum of $10 million in annual revenues, 50 percent of which is through online and/or mobile channels, pay $3.04 for every dollar of fraud. This is compared to mid-to-large non-digital financial services companies with less than 50 percent of revenue from online or mobile channels, which pay $2.35 for every dollar of fraud.
Fraud costs as a percentage of revenues is also higher among mid-to-large digital financial services companies.
“As digital channels become more prevalent, particularly with consumer demand for mobile banking, fraud is a significant drain on financial services companies' revenues — more than just the value of the fraud itself,” said Paul Bjerke, vice president of fraud and identity management strategy at LexisNexis Risk Solutions.
“These companies need to track and combat fraud effectively to reduce the cost on their business and protect their customers in the new digital age,” Bjerke continued.
Other key findings from the study include:
— Identity fraud, including synthetic identity fraud, is a significant issue for financial services firms, particularly in larger banks with more than $50 million in revenue. The study showed 62 percent of fraud losses for these banks are due to identity fraud. Furthermore, three-fourths of mid-large digital firms indicate identity verification as a top online challenge; they are also more likely than other financial services companies to cite device verification and excessive manual reviews as a challenge.
— Financial services firms that track fraud costs by both channel and payment method experience lower fraud costs: $2.49 per dollar of fraud, versus $3.04 per dollar of fraud. 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 layer fraud prevention solutions to counteract both identity and transaction fraud experience fewer false-positives, manual reviews and a lower overall cost of fraud.
"As the risk of identity and transaction fraud grows, particularly among digital channels, financial services companies must implement a multi-layered approach to fraud prevention. This approach helps accelerate the good transactions, and reduces the costs associated with manual reviews, successful fraud attempts and generates fewer false-positives," said Kimberly Sutherland, senior director of fraud and identity management strategy, LexisNexis Risk Solutions.
This project is the eighth annual comprehensive research study on U.S. merchant fraud conducted by LexisNexis Risk Solutions. The methodology of the results contained in this news release targeted U.S. financial services companies with a comprehensive survey of 185 risk and fraud executives conducted during March and April 2017. Respondents represented all channels, company sizes, industry segments, and payment methods.
Analysts pointed out the overall margin of sampling error is /minus 7.2 percent at the 95 percent confidence level. Data reflects the U.S. population of financial services firms based on weighting to U.S. Economic Census.
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