Bankers must pay very close attention to the cost of fraud. They must know how to optimize their budgets in ways that keep costs low while also minimizing risks. To guide you in the right direction, this post looks at the current costs of fraud for financial institutions.
1. Every dollar of fraud costs $4.23
U.S. financial institutions spend $4.23 in remediation costs for every dollar lost to fraud. Remediation costs include legal fees, fraud processing, investigation, and recovery costs. Banks have the highest costs at $4.36 for every dollar of losses. Mortgage firms are close behind with remediation costs of $4.20 per dollar lost.
To ensure you’re not overspending, carefully review your remediation processes. Identify ways to reduce legal costs, streamline fraud processing, speed up investigations, and improve recovery efforts. If possible, work with other financial institutions to improve the efficiency of remediation processes.
Then, revisit and strengthen your fraud prevention efforts. The fact that remediation costs quadruple losses stresses the importance of reducing fraud, not just detecting it. Financial institutions that want to lower costs should consider increasing financial resources for fraud prevention.
2. The cost of fraud varies based on the type of fraud.
The cost of fraud ranges from $2.92 to $4.81 depending on the type of fraud involved. As of 2023, fraud related to buy-now-pay-later (BNPL), automated bots, and business email compromise (BEC) tends to cost more than other types of fraud. Pay close attention to these specific risks, but also track fraud cost trends for your financial institution.
Make sure that you understand the cost breakdown for various types of fraud. Then, outline strategies for closing the most expensive security gaps. Pay attention to both the cost per event and the overall cost of different types of fraud. You don’t want to hyperfocus on the most expensive fraud costs and inadvertently make yourself vulnerable to smaller but more prevalent fraud incidents.
3. Mobile fraud accounts for about a third of all fraud costs.
Mobile fraud accounts for 32% of all fraud costs at financial institutions and 37% of fraud costs at lenders. The stunning thing about this fact is the quick growth of this fraud segment. The previous year, mobile fraud only represented 5% of financial institution fraud costs and 12% of lender fraud costs.
If your financial institution is still in the process of embracing digital services, don’t let these numbers scare you. Shying away from mobile services due to the risk is counterproductive. Even if you’re leveraging in-person services to attract and retain certain clients, you also need to offer digital services.
The financial institutions that were the best poised to protect themselves weren’t the ones that didn’t offer mobile services. Rather, they were the ones with the most flexible fraud processes. They didn’t overfocus on last year’s most prevalent threats. They often leaned on cyber threat intelligence to identify emerging threats and strengthen defenses accordingly.
4. Fraud losses and attacks vary from region to region.
Fraud costs vary from area to area. To optimize your fraud detection processes, you should be aware of the different threats in each of the markets you have a presence. And you may want to modify your approach accordingly.
North Dakota, for example, has the highest losses per victim at $31,711, but the state only has 670 victims per year with total losses of just over $21 million. New York has the second highest losses per person at $19,266. While that number is significantly lower than North Dakota’s per-person losses, New York State’s total losses are about $560 billion (over 25 times more).
Other states that make the top 10 list for biggest losses include South Dakota ($19,065), California ($18,320), Michigan ($16,617), Massachusetts ($16,393), Connecticut ($16,020), New Jersey ($15,878), Utah ($15,354), and Texas ($14,732).
The states with the most overall fraud don’t have a lot of overlap with the above list. With 1,017 fraud reports for every 100,000 people, Rhode Island comes in first. That’s followed by Alaska (608), Colorado (507), Nevada (452), Delaware (446), Maryland (438), New York (417), Washington (402), Oregon (402), and Arizona (392).
5. Education plays a key role in reducing fraud losses.
To fight fraud, you need real-time, AI-powered, machine-learning fraud detection tools, but you also need to educate your customers and your employees. In the financial services industry, 66% of fraud losses start with a consumer phishing attack, and for lenders, the number is even higher at 75%.
Preventing these losses requires you to make your customers aware of the risks. Additionally, you should also look at your fraud prevention strategies. Are you only screening payment transactions for signs of fraud? Or are you monitoring all customer interactions for potential signs of fraud — with account takeover, new account fraud, and loan fraud, there are often several red flags before the money changes hands.
You also need to educate your employees about the risks of business email compromise (BEC). Approximately 71% of financial institutions reported a security breach related to BEC last year, and if you are not proactive about educating your employees, you are at a heightened risk of these attacks.
Ready to reduce your fraud costs? Then, you need to focus on fraud prevention and streamlining remediation processes. We can help. At SQN Banking Systems, we focus on fraud so that our clients can focus on the other aspects of running a successful financial institution.
Let’s reduce losses and protect your bottom line. To learn more or to schedule a free fraud process review, contact us at SQN Banking Systems today.