Fraud and economic crime continue to cost companies billions of dollars annually across the world. Customer fraud and cybercrime perpetrated by external bad actors constitute a majority of these crimes. A study by Juniper Research forecasts over $200 billion in financial losses between 2020 and 2024 on account of online payments fraud across key industries like travel, e-commerce, and financial services. In the US, fraud losses on account of identity fraud alone in 2020 were over $55 billion, making it the most prominent method.
From an enterprise point of view, ‘fraud loss’ does not equate to ‘cost of fraud.’ Fighting fraud is a daunting and expensive challenge. Companies need to continuously assess the pace and evolution of fraud in their business and operations to adopt and implement effective fraud management. In addition to the direct losses, investments in fraud prevention systems and tools, personnel cost, and the adverse impact on revenue caused by bad customer experience add up significantly to the total cost of fraud in an enterprise. As per a study by LexisNexis, financial services companies in the US incur an average fraud cost of $3.65 for every dollar of fraud loss.
However, underinvesting in proactive fraud prevention on account of cost is a common mistake many organizations commit. The lack of visibility into the magnitude of potential fraud risk is the main reason for this.
Risk assessment is a critical success factor in reducing the impact of fraud. According to a study by PwC, nearly half of global organizations do not perform a formal risk assessment as a fraud prevention measure. Enterprise-level risk assessment looks at the entire scope of the organization’s activities and the points of exposure to risk and its magnitude at various levels within the operating model. When actioned, the outcome is a set of fraud prevention policies and controls mapped to the identified risks, supporting systems & solutions, and the optimal resourcing required for incident management and reporting. Periodic risk assessment can help companies move from being defensive and reactive to implementing proactive fraud management measures. The Association of Certified Fraud Examiners study highlights that risk assessment as a critical component of proactive fraud prevention can cut down fraud losses by 38%.
That said, the ROI of fraud operations is a crucial concern within organizations. Here are three strategies that companies may consider to improve their fraud management ROI while ensuring protection against the ever-increasing sophistication of fraud vectors:
In most companies, years of reactive fraud management have led to a spaghetti of tools and applications to address fraud, resulting in high levels of redundancy and inefficiency. The outcome is high operational costs and the lack of agility and responsiveness to new fraud vectors. Innovation in cybersecurity, identity verification, and threat detection based on machine learning, behavioral analytics, and Phone-Centric Identity™ now offers the opportunity to automate parts of fraud operations that were hitherto human-centric. Additionally, best-of-breed and state-of-the art-applications that are currently available help rationalize and streamline the fraud solutions landscape. For instance, identity verification and fraud detection—that are two distinct parts of Customer Identification Procedure (CIP), possibly supported by different applications today—could now be rationalized into a single platform that does both.
Rationalization of the fraud application landscape delivers significant cost benefits and efficiency gains in the context of complex and orchestrated processes such as customer onboarding, business onboarding, and online payments.
Organizations tend to define inherently defensive fraud strategies. On the one hand, it reduces incidents of fraud, but on the other, it impacts customer experience, approval rates, and the cost of operations. An operating model based on a defensive fraud strategy results in a high number of false positives prompting human-centric exception processing, which reduces pass rates, directly impacting revenue prospects and customer lifetime value. Instead, organizations must change their approach to fraud management and leverage the underpinning processes and systems to increase the confidence level in identification and authentication, thereby minimizing human intervention and improving pass rates.
A good example is how a Tier 1 US credit card issuer has used Prove Pre-fill™, a product designed to improve application completion rates and reduce identity fraud rates simultaneously.
In most organizations, especially large enterprises, fraud management lies fragmented across business lines. Although aimed at improving autonomy in decision-making, this approach makes it difficult to monitor, measure, and prevent fraud across the whole business. The slowest unit becomes the weakest link in executing an organization-wide fraud prevention strategy. With little reuse across business lines, redundancies in systems and solutions add to avoidable operational expenditure. Additionally, the overall agility and pace of innovation suffer due to this fragmentation.
An organization-wide shared competency center resolves many of these issues and brings a razor-sharp focus on executing a defined strategy. It puts the onus of risk assessment and measurement on a single unit, thus enforcing accountability. Organizations running a centralized and shared fraud operations unit benefit from high levels of standardization and therefore economies of scale. Shared competency centers deliver significant cost reduction and efficiency gains in fraud operations, translating to measurable ROI improvement. Competency centers also tend to invest in research & development and training—two crucial aspects in fighting the supercharged world of fraud and economic crimes.
To learn more about how to leverage fraud prevention to improve business metrics and ROI, visit the Prove blog.