F The True Cost of Fraud Financial institutions have been inundated with fraud losses for the past several years, and the COVID-19 pandemic and the overall downturn in the economy have only made things worse. The Federal Bureau of Investigations (FBI) reports that natural disasters have historically brought fraudsters out of the woodwork, pouncing on a pool of vulnerable victims: the more catastrophic the event, the more active the fraudsters. The COVID-19 pandemic was arguably the worst worldwide disaster in decades, and an increase in fraud has been detected on a wide scale. The downturn in the economy has undoubtedly affected fraud statistics as well. According to PWC, rising prices can have substantial implications on fraud risks. Inflationary periods are likely to exacerbate all three components of the fraud triangle, those being incentive, opportunity and rationalization. With surging costs of living and financial hardships, individuals will potentially have added incentives to carry out fraud. They will likely consider the economic problems faced to be a rationalization of their actions. Fraud by the Numbers Financial institutions and consumers must stay one step ahead to protect themselves from falling victim to fraud schemes. According to the Federal Trade Commission (FTC), consumers lost $8.8 billion to fraud in 2022, a 44% increase over the prior year and a trend that continued into 2023. This, of course, doesn’t include fraud losses that were not filed because the victim was embarrassed or didn’t know how to report it. Social media scams account for the highest losses and are higher than any other fraud typology, at a reported half-billion total loss. Phone calls report the highest per-person loss, at a $1,400 median loss per victim. The Three Pillars Financial institutions are tasked with understanding the full scope of the fraud’s impact. It extends far beyond the potential monetary losses associated with each fraudulent transaction. In assessing the true cost of fraud, Gartner, a respected technological research and consulting firm, has coined three distinct pillars related to the cost of fraud. The first pillar is the overall hard dollar loss rate experienced from illicit transactions. This is the immediate financial hit that impacts the bottom line. It encompasses not only the amount of funds extracted by fraudulent means but also the ancillary financial repercussions, such as transaction reversal costs and compensation paid to affected clients. This tangible loss is often the easiest to quantify, yet it is merely the tip of the iceberg in fraud-related costs. The second pillar is the cost of technical and human resources dedicated to fraud prevention, detection and remediation. The race against fraudsters involves a continuous outlay of 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 — represents a significant operational expense. These costs are necessary and ongoing, forming a crucial barrier against fraud scams. The third pillar, the client value impact, is associated with attrition rates following fraud incidents. The erosion of trust caused by incidents of fraud can lead to a decline in client retention. Each customer lost to fraud represents loss of future revenue stream. A bank not only loses the lifetime value of lost customers but also incurs higher costs in attempting to acquire new customers to fill the gap. Reputational Risk Separate from these pillars, financial institutions suffer reputational risk when customers fall victim to fraud scams. The damage to an institution’s reputation after a fraud incident can have far-reaching ramifications. A tarnished reputation can deter potential customers 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 is not at fault. Remember, media attention is not always positive or wanted. By Terri Luttrell, Compliance & Engagement Director, Abrigo Colorado Banker 18
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