Companies worldwide continue to lose billions of dollars annually to fraud and economic crime. Customer fraud and cybercrime executed by external bad actors account for a majority of these fraudulent activities. As per a study by Juniper Research, online payment fraud across key industries such as travel, e-commerce, and financial services will lead to over $200 billion in financial losses between 2020 and 2024. In the US, fraud losses on account of identity fraud alone in 2020 were over $55 billion, making it the most prominent fraud vector.
Companies need to continuously evaluate the pace and evolution of fraud in their business and operations to ensure effective fraud management. Direct losses, investments in fraud prevention solutions and tools, personnel cost, and revenue slumps caused by poor customer experience account for a significant share of the total cost of fraud to an enterprise. A study by LexisNexis shows that financial services companies in the US incur an average fraud cost of $3.65 for every dollar of fraud loss.
Risk assessment is a critical success factor in reducing the impact of fraud. A PwC study states that nearly half of global organizations do not perform a formal risk assessment to fight fraud. An enterprise-level risk assessment helps organizations thoroughly examine the scope of their activities, determine the gaps in risk management, and assess the impact of fraudulent activities at various levels within the operating model. The outcome is a set of fraud prevention policies and controls mapped to the identified risks, supporting systems and solutions, and the optimal resourcing required for incident management and reporting.
Periodic risk assessments can help companies transform from defensive and reactive to implementing proactive fraud management measures. A study by the Association of Certified Fraud Examiners states that risk assessment as a critical component of proactive fraud prevention can reduce fraud losses by 38%.
Here are three strategies that can help companies improve their fraud management ROI and tackle evolving fraud vectors:
1. Automate and Rationalize the Fraud Management Solution Landscape
Most companies are plagued by severe redundancy and inefficiency caused by years of reactive fraud management through innumerable tools and applications. The outcomes are high operational costs and sluggish responses 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. Companies can leverage ultra-modern applications to rationalize and streamline the fraud solutions landscape. For instance, identity verification and fraud detection—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.
2. Drive Revenue Using Fraud Detection
Organizations tend to define inherently defensive fraud strategies. Although these strategies reduce fraud, they impact customer experience, approval rates, and the cost of operations. A defensive fraud strategy-based operating model leads to 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 adopt a different approach to fraud management and leverage the underpinning processes and systems to strengthen identification and authentication, thereby minimizing human intervention and improving pass rates.
3. Manage Fraud by Adopting a Shared Competency Center Model
In most organizations, especially large enterprises, fraud management lies fragmented across business lines. Although aimed at improving autonomy in decision-making, this approach complicates monitoring, measuring, and preventing 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. Besides, ‘fragmented’ fraud management hampers overall agility and slows down innovation.
A shared competency center model enforces accountability by putting the onus of risk assessment and measurement on a single unit. Organizations running a centralized and shared fraud operations unit benefit from high levels of standardization and therefore economies of scale. Shared competency centers lead to significant cost reduction and efficiency gains in fraud operations, translating to measurable ROI improvement. Competency centers also tend to invest in research and development and training—two powerful weapons to thwart fraud and economic crimes.