Is fraud just another cost of doing business?

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.