Back
Share

Is fraud just another cost of doing business?

Cost of fraud blog

Many executives write off fraud as just another cost of operating their financial institution (FI). Fraud is, beyond a doubt, a “cost” all FIs must factor into revenue projections, but is it an inevitable cost that a financial services business must accept and account for—similar to office leases or employee salaries? Or is it something that financial services can actually strive to minimize—and even eliminate?

The direct and indirect costs of fraud

Before answering that question, let’s break down the main drivers of fraud cost. There is a direct cost: i.e., the actual amount of money you lose from someone successfully defrauding you. According to Alloy’s inaugural fraud report, 70% of respondents have lost over $500K in direct fraud losses in the last twelve months, and almost one-third 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 of fraud 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 2021, the average fine for AML-related compliance breaches, for example, was $34.4M. Meanwhile, because social media now keeps pace with modern business, mishandling individual instances of fraud will damage your reputation with customers quickly, lower strategic partners' confidence, and possibly draw unwarranted regulatory scrutiny.

A robust fraud prevention and management system can directly decrease 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 fraud costs as well as some indirect costs — such as legal repercussions, regulatory fines, and reputational damage. At the end of the day, some indirect costs — such as the costs necessary to prevent, detect and mitigate fraud should always be part of your budget, but then again so should buying locks for your doors.

And the verdict is…

So, is fraud just another cost of doing business? Yes and no. We use banks and financial institutions to safely and securely store and transmit money so preventing fraud is absolutely part of their mandate, but money spent is not always money lost. Investing in prevention upfront will save you a considerable amount in direct fraud losses and some of the more expensive indirect costs of fraud down the line. Comparatively, firms in financial services also spent nearly 11% of their IT budget on cybersecurity in 2020 to avoid similar consequences, such as reputational damage, direct financial losses, and regulatory repercussions.

With the right tools and people handling your fraud controls and processes, you can work to bring the biggest costs of fraud down, protect your customers against becoming victims of fraud, and figure out how to let more good customers in — turning fraud from a “lost cost” into a strategic differentiator between you and your competitors.

91% of financial institutions said fraud increased year-over-year in 2022.

Find out how your peers are driving down fraud costs.

Download the State of Fraud Benchmark Report

Related articles

5 min read
Behind the mask of third-party fraud

By Ricardo Wiesner on Oct 13, 2022

Third-party fraud poses a threat to banks and fintech companies. Not only are there multiple ways for fraudsters to get around your defenses—their methods are constantly evolving. Read on to learn how to stop this dangerous type of fraud.

Read more

5 min read
Fraudsters adapt. So should your fraud prevention strategy.

By Yigit Yildirim on Sep 6, 2022

We asked Yigit Yildirim, Socure’s Vice President and Head of Fraud & Risk, to offer his perspective on the modern identity fraud stack, paths to optimize fraud efficacy, and consider how forward-thinking fraud teams should prepare for changing economic conditions.

Read more

5 min read
On the front lines of a fraud attack

By Sophie Shin on Aug 8, 2022

An Alloy Client Success Manager takes you through his first-hand experience helping one of our clients work through a fraud attack.

Read more

5 min read
How you can stop fraud at the flip of a switch

By KJ McAlpin on Jun 17, 2022

You don’t want to get caught in a fraud attack and then have to scramble to figure out how to respond, build new workflows and integrate with new data providers. We share some tips on how you can stay one step ahead of fraudsters.

Read more

Back
Recent Searches