The cost of fraud for credit unions.
A dollar of fraud costs credit unions and other financial institutions $2.67 in chargebacks, fees, interest and labor, according to a new study by LexisNexis Risk Solutions.
The survey of 185 risk and fraud executives at credit unions, banks, wealth-management companies, trusts and investment firms found that fraud's price tag is even higher when the institutions have at least $10 million in annual revenue and earn at least 50% of it via online or mobile channels. For them, every dollar of fraud costs $3.04, versus $2.35 for similar institutions that get less than 50% of their revenue from online or mobile channels.
Fraud included misuse of stolen payments methods or personal information, as well as bounced checks and fraudulent requests for refunds or returns. It excludes insider fraud and employee fraud.
"As digital channels become more prevalent, particularly with consumer demand for mobile banking, fraud is a significant drain on financial services companies' revenues — more than just the value of the fraud itself," LexisNexis Risk Solutions vice president of fraud and identity management strategy Paul Bjerke said. "These companies need to track and combat fraud effectively to reduce the cost on their business and protect their customers in the new digital age."
The study also found that over a third of monthly transactions are fraudulent among institutions with at least $10 million in annual revenues. The mobile channel is a big culprit, according to LexisNexis Risk Solutions.
"There are concerns that it adds significant risk, with less confidence in the security of mobile device transactions," the study said. "But as more consumers use their mobile devices for financial transactions, demand will require financial firms to offer this channel. For those who already offer it, there is concern about the impact of new transactions methods and verifying location to determine if a transaction is fraudulent. For mid/large digital firms, there is nearly as much fraud occurring through mobile apps as a mobile browser."
Over half (56%) of fraud losses are due to identity-related fraud. However, bigger isn't always better — 62% of fraud losses at institutions with at least $50 million in annual revenue were due to identity fraud, according to the study.
Flagging transactions is now common among financial institutions, but fraud has increased the workload and cost associated with manual reviews. Between 12% and 25% of declined transactions are false positives, depending on the size of the institution, according to the data. Manual reviews now make up about a quarter of financial services firms' fraud mitigation costs.
The findings also suggested that institutions pursuing digital strategies should ensure they track prevented and successful fraud, as well as the costs of that fraud.
"Financial services firms that track fraud costs by both channel and payment method experience lower fraud costs: $2.49 per dollar of fraud, versus $3.04 per dollar of fraud. Large digital firms are most likely to track fraud costs by both channel and payment method, while mid-sized firms with revenues of $10 million to $50 million still lag behind," LexisNexis reported.
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