Identity Theft: Measuring the Cost of Fraud

Shirley Inscoe is a senior analyst with Aite Group, covering fraud, data security, and consumer compliance issues. Ms. Inscoe brings to Aite Group 30 years of banking experience in enterprise fraud and payments issues. She has served as the chair of the BITS Fraud Reduction Steering Committee and the co-chair of Early Warning Services’ Advisory Committee, and has been a member of ABA’s Deposit Account Fraud and Payment Systems Committees. She will be speaking at the NICE Actimize ENGAGE Client Forum in New York, on October 21st on Fraud Threats: How Do Your Customers Perceive Them?

How do you measure the cost of identity theft? There are so many variables to consider that the answer is not easy from anyone’s perspective.

From a consumer’s perspective, the total cost can include the loss of one’s personal financial reputation, time consumed by disputing fraudulent accounts and transactions, the time and frustration of dealing with law enforcement (who often don’t know how to respond to non-violent crime) to file a police report, and many other factors. Identity theft can actually destroy lives: In the most extreme cases, identity theft may render a consumer unable to obtain housing or cause loss of a job, harassment by collection agencies, or even jail time. Understandably, consumers often label identity theft as the type of financial fraud that they are most concerned about experiencing.

From a financial institution’s (FI’s) perspective, the costs of identity theft are very different. FIs have to budget for and fund fraud-prevention technology solutions, fund resources to work fraud alerts and cases, as well as cover expenses related to work space, telephones, management personnel, regulatory compliance, and the like. FIs must also be concerned about potential brand damage or loss of consumer confidence in the institution’s ability to protect its clients and their accounts.

Less readily apparent institutional costs include the attrition rate of closed accounts and, in some cases, entire customer relationships. Recent Aite Group research shows that 28% of consumers change FIs after experiencing fraudulent transactions on an existing account. Of those consumers who experienced a fraudulent new deposit or credit account opened at their own FI, a whopping 47% changed banks or credit unions. Lack of customer understanding about replacement cards issued due to a data breach or fraud incident incurs additional costs, including back-of-wallet behavior.

Moreover, many FIs do little outreach to educate consumers about financial fraud; only 40% of consumers indicate that they rely on their FI for such information. In an era when consumers are ready, willing, and able to work with their financial institutions to protect their accounts from fraud, surely more attention should be paid to educating consumers not only about how they can protect themselves, but also about how they can collaborate with their financial institution to prevent fraud.

When it comes to financial warfare, enlisting customers in the ranks of the “good guys” should be an essential priority in the battle against fraudsters. Doing so can pay off in unexpected ways such as improved customer loyalty and increased revenue.