COVID-19 has remained at the forefront of the news for most of 2020; its impact felt by individuals and businesses throughout the world. Along with the public health and economic challenges has come an unanticipated problem for financial services firms and lenders—a significant increase in fraud.
LexisNexis® Risk Solutions has just released its 2020 True Cost of FraudTM Study—Financial Services & Lending Report U.S. & Canada Edition. The study indicates that organizations are facing mounting losses, particularly as the pandemic continues into 2021. Before COVID-19 shutdowns, for every $1 of fraud loss, financial services and lending firms actually lost $3.78, which increased to $4.21 during the shutdowns.
An increase in successful fraud attacks
Fraud is on the rise for American and Canadian financial services and lending firms, impacting a broader set of mid/large size firms including digital and non-digital, according to the 2020 Total Cost of Fraud report.
The COVID-19 shutdown resulted in the movement of more transactions to remote channels. And because fraud is easier to commit online and on mobile, financial services and lending firms saw a surge in the overall number of fraud attacks and in the number of successful attacks since the pre-COVID-19 period in 2020.
These numbers reveal the difficulty in preventing fraud and the competence of criminals to find creative new ways to get through fraud detection checkpoints.
Balancing fraud prevention with customer friction
Identity verification is crucial to fraud prevention. It remains a top challenge in online and mobile channel transactions. In fact, Identity verification was named as the number one challenge for both U.S. financial services and lending firms in the online channel (44%) and mobile channel (40%).
Financial services firms and lenders that haven’t invested in digital-based risk mitigation solutions struggle with:
• Limited ability to confirm transaction location
• Limited access to real-time risk assessment data and tools
• Limited transparency from non-bank payment providers
Advanced identity and transaction verification has seen some increase of use in the U.S. financial services and Lending sectors, with financial services reflecting higher use overall. For example, 68% of U.S. investment firms report using real-time transaction scoring while U.S. lending firms are somewhat lower at 52-56%. Advanced identity verification use is very limited in Canada.
It’s not surprising that organizations are hesitant to implement security measures that cause customer friction. When new account openings or transactions are slowed by non-risk-appropriate verifications, the customer can understandably be annoyed. Companies can take confidence from our new findings; the cost of fraud decreases with the degree companies integrate their cybersecurity with customer experience and fraud operations. The cost of fraud for U.S. financial services and lending companies who have fully integrated cybersecurity and customer experience compared to those who have not at all is $3.81 compared to $4.53 after COVID-19 shutdowns. Finding the balance is critical.
Detecting fraud requires more than one solution
Because there is no singular type of fraud, there is also no silver bullet for fraud detection and prevention, according to the 2020 Total Cost of Fraud report.
Today’s businesses operating online and on mobile require solutions that can verify and authenticate identities in real time, while minimizing negative impact on the customer experience. They need third-party data sources and transaction tracking tools that:
• Assess the transaction risk—Monitors historical transaction patterns of an individual against their current transactions to detect irregularities.
• Authenticate the physical person—Verifies the name, address, DOB, personal knowledge, or a CVV code associated with a card.
• Authenticate the digital Identity—Uses behavioral biometrics to analyze human-device interactions and behavioral patterns to discern real users from imposters.
Using a layered model is what works best; including digital, physical and analytical insights is critical while still using risk appropriate authentication methods. The study shows that organizations are trying different types of solutions, but there is still limited use of solutions that address digital identity and behavior threats.
Fraud prevention in a post-pandemic world
COVID-19 has increased fraud attacks and emboldened criminals. According to the True Cost of Fraud Study, that trend may continue even after the pandemic has ended because fraud attacks were on the rise prior to the COVID-19 shutdown.
As more transactions move to online and mobile channels, the challenge to compete for customer business will only intensify. Financial services and lending firms must be prepared to fend off more fraud attacks, while those attacks become increasingly sophisticated, particularly with regard to global crime networks.
To keep fraudsters at bay while managing risk appropriate customer friction in the remote channels, financial services and lending firms should look to layering multiple solutions that offer real-time, third-party data and analytics, which are critical for identity verification and authentication.
Perhaps the biggest takeaway from The True Cost of Fraud Study is that prevention is no longer only about the cost of fraud. What’s truly at stake is something much larger and more significant—the customer relationship and brand integrity.
Want to know more? Download the LexisNexis® Risk Solutions 2020 True Cost of FraudTM Study—Financial Services & Lending Report, US & Canada Edition.
Note: Statistics used in this article were taken from data collected for the LexisNexis® Risk Solutions 2020 True Cost of FraudTM Study: Financial Services & Lending Report US & Canada Edition.