Businesses around the world feel mounting pressure to mitigate the impact of fraud, especially now when the costs of doing business are increasing. According to a recent report, fraudster threats against businesses have risen 46% since the beginning of the COVID pandemic. The report points to rapid digital acceleration, stay-at-home orders, and an increase in the use of services like online banking and telecommunications.
In addition, the Association of Certified Fraud Examiners (ACFE) estimates that businesses lose an average of 5% of annual revenue to fraud each year, but this figure may be higher because of the recent swell in fraud threats.
A silver lining is that even though fraud attempts are on the rise, the costs of fighting fraud don’t have to rise incongruence. Organizations can minimize fraud costs without sacrificing the efficacy of their program by optimizing their total cost of fraud (TCOF).
What is the total cost of fraud?
Fraud losses cover a wide area, not just fraud losses. That’s why it’s important to understand the total cost of fraud and how it impacts your bottom line.
TCOF includes a number of moving parts:
- Fraud losses: The total amount stolen or lost via fraudulent transactions, accounts, and chargebacks.
- Fraud prevention tools and headcount: The cost of technology and programs used to detect and prevent fraud plus the the cost of your human resources to combat fraud.
- Customer lifetime value impact: A “hidden” and sometimes immeasurable cost when good customers experience friction, are the victims of hacked accounts or fraud, or are identified as false positives.
The costs of each of these elements impact the costs (and ROI) of your fraud program. Even if you manage to lower your fraud rate, other items like a high headcount or expensive technology costs can actually increase your total cost of fraud. In turn, this prevents your fraud efforts from reaching their full potential.
When you can optimize each of these parts, you can keep your fraud fighting costs low and the ROI high.
Opportunities for fraud cost optimization
Maximizing fraud prevention efforts requires companies to find the balance between lowering the fraud rate while also resulting in the lowest possible TCOF. Here are some optimization opportunities in each of the three TCOF buckets:
Fraud losses
Reducing the fraud rate starts with enforcing stricter detection policies. More fraud detected can have a positive impact on chargeback costs and deter future acts of fraud from the same bad actors.
Tools and headcount
Tools are an essential part of the process, so negotiating vendor costs or exploring other vendors can be good places to start. Increasing automation for investigation and case review may also help to reduce the necessary headcount without sacrificing performance.
Customer lifetime value
Creating friction for good customers can harm the total customer lifetime value. Reducing false positives through accurate decisions powered by machine learning can minimize the direct impact to customers.
Finding the right balance can be a little tricky since there is no one-size-fits-all answer.
