Today's financial institutions are grappling with significant rises in various types of fraud. Check fraud has surged, driven by the exploitation of PPP and stimulus checks and vulnerabilities in the postal system, with fraudsters using techniques like mail theft and check washing. FinCEN reports that Suspicious Activity Report (SAR) filings for check fraud in 2022 alone exceeded 680,000, nearly doubling the number of filings the previous year, and this year, check fraud is projected to reach a staggering $24 billion globally. Online fraud, including investment scams and pig butchering scams, has also escalated, with sophisticated schemes targeting unsuspecting investors. The increase in ATM fraud further highlights the need for enhanced security measures as criminals adapt their methods to bypass existing defenses.
The true cost of fraud for banks—beyond monetary fraud losses
Measuring the cost of fraud losses
The true cost of fraud goes beyond initial monetary losses. Read on for factors your institution should consider in its plans to combat fraud.
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Takeaway 1
Fraud scams made worse by the pandemic continue to be successful, with check fraud, investment scams, and ATM fraud rising.
Takeaway 2
Three pillars of fraud costs impact financial institutions and spread resources thin: hard dollar losses, investment in prevention, and client value impact.
Takeaway 3
The true cost of fraud also includes reputational risk, compliance issues, and regulatory penalties. Prevent fraud losses with the best practices below.
By the numbers
Consumer and bank fraud losses
The factors mentioned above created abundant opportunities for fraudsters, and financial institutions and consumers must stay one step ahead to protect themselves from falling victim to a myriad of fraud schemes. According to the FTC, consumers lost more than $10 billion to fraud in 2023. This marks a 14% increase over 2022. More consumers reported losing money to investment scams—more than $4.6 billion—and the second-highest fraud category was imposter scams, with fraud losses of nearly $2.7 billion reported. The FTC also reports that consumers lost more money to bank transfer and cryptocurrency fraud than all other methods combined. This, of course, doesn’t include fraud losses that were not filed due to the victim's embarrassment or lack of knowledge on how to report. No matter the medium used, it is clear fraud continues to grow and cannot be ignored.
The true cost of fraud extends far beyond direct financial losses. This blog explores the ways that fraud losses impact financial institutions' bottom line and how its hidden costs can add up. Institutions must invest not only in advanced security measures and skilled personnel but also in client education and community engagement to combat fraud effectively.
Three pillars
Evaluating the costs of fraud
Leaders within financial institutions are frequently tasked with grasping the full scope of a bank's fraud losses and their impact. It's essential to recognize that the repercussions extend far beyond the immediate monetary losses from each fraudulent transaction. To fully appreciate the actual cost of fraud, one must delve into its complex nature and wide-ranging effects.
1. Hard dollar losses
The first pillar encompasses the overall hard dollar loss rate experienced from illicit transactions. This represents the immediate financial hit impacting the bottom line, including not only the amount of funds extracted by fraudulent means but also the associated financial repercussions, such as transaction reversal costs and compensation paid to affected clients. While this tangible loss is the easiest to quantify, it merely scratches the surface of fraud-related costs.
2. Technical and human resource costs The second pillar concerns the cost of technical and human resources dedicated to fraud prevention, detection, and remediation. The race against fraudsters demands continuous investment in cutting-edge technologies designed to safeguard against intrusion and theft. Additionally, the human capital investment—in terms of both hiring fraud prevention experts and training existing staff—constitutes a significant operational expense. These costs are necessary and ongoing, forming a crucial barrier against fraud scams.
3. Client value impact The third pillar, the client value impact, addresses attrition rates following fraud incidents. The erosion of trust caused by fraud can lead to a decline in client retention, a critical issue for financial institutions. Each client lost to fraud represents future revenue streams that are now gone. The relationship between fraud incidents and client departure is a serious concern, as the institution not only loses the lifetime value of the client but also incurs higher costs in attempting to acquire new clients to fill the void.
By understanding these three pillars, leaders can better assess the true cost of their bank's fraud losses and allocate resources more effectively to mitigate its impact.
Non-financial risks
Additional consequences of fraud loss
Reputational risk
Separate from these pillars, financial institutions suffer reputational risk whenever a client falls victim to fraud scams. The damage inflicted on an institution’s reputation after a fraud incident can have extensive ramifications. A tarnished reputation can deter potential clients and negatively affect existing relationships, as trust is critical in a financial relationship. According to research by Javelin Strategy & Research, 31% of clients are more likely to leave the financial institution after a fraud event, even when the bank or credit union is not at fault.
Regulatory risk
Regulatory risk is yet another significant concern. As overseers tighten the leash with stringent regulations aimed at protecting consumers, the cost of compliance grows. Failure to meet these standards can result in regulatory sanctions, fines, and a mandate for expensive corrective measures. Moreover, non-compliance can lead to enhanced scrutiny by regulators and the possibility of heightened requirements in the future.
The Financial Crimes Enforcement Network (FinCEN) has listed fraud and cybercrime as two of their National AML/CFT Priorities. This is the first time fraud has been addressed at a high level as part of AML compliance, but it makes sense considering proceeds from fraudulent activity must be laundered.
With fraud now considered an AML/CFT priority, regulatory penalties and fines around fraud may be something to consider in future exams. Regulators are expecting financial institutions to address each of the priorities in their AML/CFT program, and when there are deficiencies, you can expect criticism and possibly monetary penalties. Now is the time to be sure that your fraud, AML, and IT security teams collaborate and keep each other informed on illicit trends they are detecting.
Checklist to prevent bank fraud losses
Best practices for fraud risk management
Financial institutions must approach fraud with a comprehensive strategy that accounts for direct financial loss, resource allocation, and the broader implications on client value, reputation, and regulatory standing. It is a continual battle requiring vigilance, innovation, and a commitment to safeguarding all stakeholders. Things to consider include:
- Hardware: Is your business data safe, and are updates and patches applied timely? They should always be.
- Software: Do you have adequate fraud detection software? Are you able to detect various types of illicit activity, such as check, wire, and ACH fraud?
- People: Do your investigators receive proper training? Do they have the correct skill set to detect complex patterns of fraudulent activity?
- Client education: Does your institution have avenues for client education, such as written materials, online warnings, or in-person seminars for clients and prospects? If not, this is a great way to foster community goodwill and deter fraud at the same time.
