Fraud is a major problem for businesses as well as consumers—and it’s costing an enormous amount of money every year.
Firms are struggling to stem losses while preserving the customer experience. A $1 fraudulent transaction now represents $3.25 in true costs for financial services overall, and $3.44 for lending overall. That’s an increase of about 20% since 2017 for both financial services and lending. The losses are likely to mount, given the sharp rise in successful fraud attempts over the past year.
Two new reports illustrate the seriousness of the problem. One, the 2019 True Cost of Fraud Study: Financial Services and Lending, notes that financial services and lending fraud is on the rise, costlier than ever, and not just a problem for risk managers.
Compounding the issue is the fact that firms are fighting fraud at a time of customer-centricity, where the need to provide fast, low-friction experiences is key to success. The other report, 2019 True Cost of Fraud Study: E-commerce/Retail Edition, states that for every dollar of fraud committed U.S. retailers incur $3.13 of costs.
For any business, the threat of fraud is here and growing, and it’s a risk companies ignore or underestimate at their peril.
The FBI has identified a number of common types of fraud to look out for, including business e-mail compromise, e-mail account compromise, internet fraud, data breaches, denial of service, malware, phishing/spoofing, and ransomware.
Without developing and executing a coherent, comprehensive strategy for combating various fraud tactics, organizations can put themselves and their customers at risk. One of the keys to success with such a strategy is to have cross-functional alignment when addressing the threat of fraud.
TAKING THE NECESSARY STEPS
Research firm Gartner notes in a January 2020 report, “How to Create a Payment Fraud Detection Strategy at the Organizational Level,” that payment fraud remains a persistent problem in digital channels, hampered by fraud teams working in silos with narrow objectives. Security and risk management leaders must exhibit cross-functional leadership to create fraud detection strategies that align closely with organizational goals, the report says.
There are five key steps that fraud leaders must guide internal stakeholders through.
Fraud leaders need to encourage all stakeholders to define their challenges and requirements when it comes to fraud detection, Gartner says. “The group needs to collectively recognize and understand these disparate perspectives,” the report says.
Having identified the disparate agendas of all stakeholders, fraud leaders should introduce a common model for assessing fraud impact with a Total Cost of Fraud (TCOF) model. The total cost is calculated by adding fraud losses, tools and headcount, and customer lifetime value impact.
Fraud losses include funds stolen from accounts,; stolen goods and services,; and chargeback costs. Tools and headcount include the costs of detecting and mitigating fraud,; internal systems and vendor tools,; and human resources. And cCustomer lifetime value impact includes customers directly impacted by fraud who shop or bank elsewhere,; genuine customers who experienced friction or declined transactions due to overly strict fraud policies,; and false positives.
Companies need to have a holistic view in order to effectively address fraud. “Move the focus from internal stakeholders to the customer,” the report says. “Consider the customer journey and how a fraud detection strategy would impact this from end to end.” There is significant variance across digital commerce businesses and financial institutions, around which teams are responsible for fraud detection. This can lead to a “siloed” rather than holistic approach, the study notes.
Companies need to develop an agreed-on framework that quantifies the different ways that fraud impacts the organization. There is a lack of a common framework in most organizations to bring together the different stakeholders to form an overall approach to fraud detection that aligns with organizational goals, according to the report. Within the context of the agreed-on framework and organizational goals, rather than individual stakeholder needs, stakeholders need to agree on an approach to fraud detection that balances the needs of business growth and security.
After introducing the common model for assessing the cost of fraud, fraud leaders need to align all stakeholders toward a shared philosophy for fraud detection. They must define a clear pathway from disparate thinking toward achieving a shared philosophy, and they can achieve this by involving all stakeholders and balancing their sometimes competing requirements to define a fraud detection strategy based on reducing the total cost of fraud.
Some organizations might be able to quantify the fraud rate and total cost of fraud using the model. Others might consider it a more notional concept to guide discussions around fraud detection strategy objectives, the report says. Either way, the model serves its purpose in empowering fraud leaders to align all internal stakeholders around a shared philosophy.
Rather than considering the creation of a fraud detection strategy to be a project that ends, the Gartner report says, define a path forward to ensure that the strategy evolves with changing organizational needs. Ensure that the agreed-on fraud detection strategy is implemented in such a way—both from a technical as well as a governance perspective—that it can evolve and remain relevant.
There are four key elements to this process: Automation (invest in tools and remove manual processes wherever possible); Scalability (design with business growth and extensibility in mind); Accountability (ensure transparency to the organization regarding goals and efficacy); and Evolution (develop a culture of regular critical evaluation and improvement).
CONCLUSION—OUTSMARTING FRAUD TAKES TEAMWORK
At many organizations, there is a lack of coherence with respect to creating and implementing a strategy to detect and mitigate fraud, according to the Gartner report. Many stakeholders across a variety of teams are impacted by fraud and will have their own requirements of any fraud detection strategy. Invariably, however, a single stakeholder or team is responsible for fraud management. Fraud leaders must think beyond simply implementing and managing vendor-based fraud detection solutions. Executives must demonstrate leadership in this space by defining a clear pathway to move from fraud being managed by disparate stakeholders, toward a commonly agreed-on and forward-thinking fraud detection strategy.