Bank fraud notably increased during the pandemic, but financial institutions aren’t just facing more fraud, they’re also paying more to deal with it. When Lexis Nexis interviewed over 500 risk and fraud management executives in late 2021, they discovered that the cost of bank fraud has increased substantially in the post-pandemic world.
Here is an overview of the numbers and a look at what this means for financial institutions.
The Cost of Bank Fraud in 2022
For financial services companies, fraud costs have increased between 6.7 and 9.9% from the days before the pandemic to now. In 2019, every dollar of fraud cost $3.25. In 2020, a dollar of fraud cost $3.64. Now, it’s $4.00. That’s an increase of almost 10% over the last year and 23% over the last two years.
If you isolate lenders, the increase is even higher. The average cost of $1 of fraud for a lender is now $4.16. While Canadian firms have slightly lower fraud costs, they have experienced more significant increases. In the Great White North, lenders have experienced over a 12% increase in the cost of fraud.
Most Significant Increases in Bank Fraud Costs
Mortgage lending, in particular, has seen some of the most significant increases in fraud costs. Mortgage fraud increased during the pandemic, largely due to a shift to online or mobile channels. To stay competitive, banks needed to give their customers the option to apply for mortgages online or through an app.
But unfortunately, many banks didn’t have the right tools in place to secure their digital offerings. In addition to having a greater increase in fraud incidents, mortgage fraud also just costs more in general.
In this sphere of the financial world, lenders incur $4.40 in mitigation costs for every dollar of fraud. Mortgage fraud costs have increased by 23.5% compared to before the pandemic hit.
The number of mortgage fraud incidents may go down as interest rates increase and fewer people take out mortgages. However, the cost of dealing with this type of fraud is unlikely to go down.
Fraud on Mobile Channels
As indicated above, mortgage fraud increased as borrowers migrated to mobile channels. This shift didn’t just affect mortgages. It affected all bank services delivered by mobile channels. There was a 10% increase in mobile channel fraud over the last year.
Banking customers aren’t going to back down on their demand for mobile services. They need and want to be able to deposit checks, apply for loans, and handle other banking essentials through a phone app. If financial institutions want to reduce the cost of dealing with fraud over mobile channels, they need to ensure they have safety measures in place to minimize their risks.
How to Reduce the Cost of Fraud
The fraud costs cited above are the cost of dealing with fraud. You can streamline how you respond to fraud by automating fraud investigation and case reviews. If your team has tools that allow them to review multiple incidents automatically rather than manually reviewing each incident or account, they will save time. You will save money.
You also need strategies that reduce the impact to your reputation. For instance, say that several customers have been affected by fraud. If you can reach them before the fraud affects their bank balances, your reputation won’t suffer as much. Additionally, if you offer them identity theft protection or similar services that indicate you care, you will also reduce your potential reputational damage.
While the above tactics can help, they will not create substantial savings if used on their own. Instead, if you want to reduce the cost of bank fraud, you need to reduce fraud. Rather than detecting fraud, you need to prevent it. You need a proactive fraud prevention strategy.
How to Prevent Fraud in the Post-Pandemic World
Of course, most financial institutions have a fraud prevention strategy in place, but you need to ensure that you are taking the right approach. To assess your efforts, work through the following questions.
1. Does your fraud prevention strategy address the entire customer journey?
Fraudsters aren’t just writing bad checks or stealing credit cards; they’re committing fraud at every stage of the journey. Often, the fraud starts early in the customer interaction, not just at the point where the funds are dispersed.
For example, if you can catch the fraud when the criminal signs in from a different device and tries to change the customer’s address, you’ll save money. Detecting account takeover costs less than detecting and dealing with bad checks written from an account that has already been taken over.
2. Do you use multiple legacy point systems?
Legacy fraud detection systems often focus on a single aspect of the customer journey or a single payment channel. This can drive up costs, while decreasing efficiency. You need an integrated system that can look for fraud across multiple points and channels.
3. Do your tools work in real-time?
Fraudsters don’t work bankers’ hours. They’re committing fraud 24/7/365. To detect threats against your financial institution, you need tools that work in real-time, all the time.
4. Does your fraud detection system create customer friction?
Friction drives customers away from your financial institution. If your services are hard to use and access, your customers will look for an alternative. They will use your services less frequently.
This is an aspect of fraud management that is hard to put a number on. But it definitely drives up your costs. To reduce friction, you need a system that detects fraud without creating obstacles that prevent customers from completing legitimate transactions.
5. Does your fraud detection system use machine learning?
To reduce false positives and safeguard the customer experience, your fraud prevention solution needs to use machine learning. This allows it to improve its efforts over time.
However, as the tools improve, you continue to pay the same amount. This increases the effectiveness of your fraud prevention efforts without increasing your costs.
Right now, everything is getting more expensive. As inflation is increasing at historic levels, individuals and businesses are paying higher prices for almost everything. Fraud is no exception, and arguably, as the economy enters a recession, fraud (along with most other crimes) is likely to increase.
To protect your bottom line, you need to invest in processes and services that can help your bank reduce the cost of fraud. Our real-time machine-learning fraud detection and prevention tools and services can help. To learn more, contact us at SQN Banking Systems today.