Fraud costs cause sticker shock, study finds

Consistent with current inflationary trends, a new study by LexisNexis Risk Solutions, published Nov. 16, 2022, deems battling fraud an expensive proposition.

Based on a survey of U.S. and Canadian firms conducted from May to July, the sixth annual 2022 LexisNexis True Cost of Fraud Study: Financial Services and Lending Report, found each dollar lost to fraud costs U.S. financial service providers an average of $4.23 and Canadian firms $3.78, increasing costs by 16.2 percent and 19.6 percent, respectively.

Chris Schnieper, senior director of fraud and identity strategy at LexisNexis Risk Solutions, observed fighting fraud requires both dexterity and advanced authentication methods to fight what he termed a complex scenario with multiple risks occurring simultaneously.

"To minimize fraud, organizations can no longer rely on manual processes or point solutions to reduce fraud, manual reviews and costs,” he said. “Firms using a multi-layered solutions approach that integrates identity verification and authentication within digital consumer experience can lower their cost and volume of successful fraud. This approach improves identity verification and fraud detection effectiveness and lowers friction for trusted consumers."

Evolving attack vectors

Researchers surveyed 426 U.S. and 76 Canadian risk and fraud managers at retail and commercial banks, credit unions, trusts and wealth management and finance executives in automotive, mortgage and non-bank credit card and personal loan issuers. Following are key findings from the report:

• Sophisticated attacks: Fraudsters are deploying bot attacks and buy now, pay later (BNPL) scams, increasing risks for financial services and lending firms. Banks and credit lenders are beginning to accept BNPL as a digital payment method, which respondents indicated represents one-third of the overall average transaction volume.

• Mobile channel attacks: Fraudsters are targeting mobile channels, which generate a sizeable level of transaction volume and pose increased risks to consumers and service providers, especially at the new account creation stage of the customer journey. Canadian and U.S. lenders saw the biggest increase in identity-related fraud across account creation, with a 9 percent rise and 11 percent rise, respectively, since 2020.

• Synthetic identity fraud: Fraudsters are using sophisticated methods to bypass digital identity verification, making it difficult for service providers to distinguish bots from legitimate customers without introducing friction to checkouts and customer onboarding. Lack of identity verification is a top challenge that contributes to fraud across the customer journey. With new account creation still trending upward, U.S. banks that deal with multiple types of scams attributed more identity-related fraud to new account creation.

Consumer-facing fraud costs

Researchers advised financial services providers and lenders to assess the true costs of fraud holistically by considering labor, legal and forensic investigation fees, as well as related costs of underwriting and processing consumer applications.

LexisNexis Risk Solutions stipulated the study did not include insider or employee fraud, but instead focused exclusively on consumer-facing fraud, including the following:

• Fraudulent transactions due to identity fraud, which is the misuse of stolen payments methods (for example, credit cards) or personal information

• Fraudulent requests for refunds/returns, bounced checks

• Fraudulent loan applications (that is, purposely providing incorrect information about oneself, such as income, employment, etc.)

• Account takeover by unauthorized persons

• Use of accounts for money laundering

A downloadable copy of the LexisNexis True Cost of Fraud Study: Financial Services and Lending Report is available at risk.lexisnexis.com/insights-resources/research/us-ca-true-cost-of-fraud-study#financialservices

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