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Is fraud just another cost of doing business?
The costs of fraud are steep — but so is looking the other way
Many executives write off fraud as just another cost of operating their financial institution (FI). While fraud is, beyond a doubt, a “cost” all FIs must factor into revenue projections, we wanted to ask: Is fraud actually an inevitable cost that banks, credit unions, and fintechs must accept and account for — similar to building leases for banking branches or employee salaries? Or is fraud something that financial service providers can actually strive to minimize, and even eliminate, with the right strategy?
The direct and indirect costs of fraud
Before we answer, let’s break down the main drivers of fraud cost. There is the direct cost: in other words, the actual amount of money you lose when someone successfully defrauds your institution. According to Alloy’s 2024 State of Fraud Benchmark Report, 54% of respondents have lost over $500K in direct fraud losses in the last twelve months, and 25% of respondents lost over $1M in direct fraud losses in the last twelve months.
When you combine that with indirect costs associated with fraud, the total cost becomes pretty significant. Indirect fraud costs include the impact of reduced customer growth if companies close their funnel and expenses like the cost of investigating where the fraud is coming from, recovering fraud funds, and the budget allocated to fraud prevention. There are also longer-term indirect costs, such as legal repercussions, regulatory fines, reputational damage, loss of customers, and class action lawsuits.
These indirect costs can add up fast. In 2023, individuals and organizations were slapped with a hefty $6.6 billion in compliance fines, dwarfing the $4.2 billion and $5.4 billion in fines imposed in 2022 and 2021, respectively. Among the areas of non-compliance were anti-money laundering measures, customer due diligence, and environmental, social, and governance matters. Mishandling individual instances of fraud can quickly erode customer trust, given today's social media-driven business landscape. This can undermine the confidence of strategic partners and even attract unwarranted regulatory scrutiny.
A robust fraud prevention and management system can directly reduce the number of bad actors that make it through your fraud controls which will increase your chances of stopping them. It will also drive down direct and indirect fraud costs — like legal repercussions, regulatory fines, and reputational damage.
And the verdict is…
So, is fraud just another cost of doing business? Yes and no.
The point of banks and financial institutions is to store and transmit money safely and securely, so preventing fraud is absolutely a part of their mandate.
However, it's important to recognize that not all money spent is money lost. Investing in fraud prevention upfront will save you from considerable direct fraud costs. Plus, it can prevent some of the more expensive but indirect costs of fraud that can happen down the line.
Some indirect costs — such as the costs necessary to prevent, detect, and mitigate fraud — should always be part of your budget. Then again, so should buying locks for your doors. Perhaps this is why 75% of banks, fintechs, and credit unions are interested in adopting an Identity Risk Solution in the next year. These solutions leverage multiple fraud prevention tools — like automated step-up verifications, alternative datasets, and machine learning — inside of one central console to monitor for fraudulent behaviors and identities at onboarding and throughout the customer lifecycle.
When you have the right tools and people behind your fraud controls and processes, fraud is no longer a “lost cost” — it’s a strategic differentiator between you and your competitors.
If you can prevent fraud while also reducing customer friction, then fraud stops being a threat and becomes a competitive advantage.