Article

How Can Fraud Prevention Drive Customer Growth?

Guidehouse and American Banker Survey Results

By Ajay Guru, Tim Mueller

Many financial institutions see fraud reduction as a risk management function, but they often don’t connect it to the customer experience—or understand how it can be leveraged for growth through customer education about current fraud scams. Customers care about a secure experience, and they can and want to play a key role in helping companies identify fraud. However, antiquated, reactive approaches to fraud prevention can make the connection between the customer experience and fraud reduction difficult to quantify or address.

In June 2022, Arizent and American Banker conducted an online survey of banks, wealth management, money transfer, and financial technology organizations. The survey was the third in a series conducted on behalf of Guidehouse and sought to understand organizations’ approaches to monitoring and preventing fraud.

 

Firms Aren’t as Proactive About Fraud Prevention as They Think

Nearly three of four firms (73%) think they are using a proactive approach to fraud prevention. Not everyone in the organization, however, is equally confident about that stance. Only 55% of executive managers describe their organization’s approach as proactive, substantially fewer than employees from areas like IT (74%) and compliance (87%).

Executives apparently perceive something that others in the company are more likely to miss: That the performance metrics and tools most companies use to measure fraud may be overly reactive. For example, more organizations rely on transaction data—a metric that only becomes available after fraud has occurred—than any other type of fraud indicator. By contrast, fewer than half use timely metrics such as ongoing technology assessments and pre-authorization risk analysis to measure their success—it’s these latter metrics and tools that are more likely to prevent fraud before it happens.

Firms could drive a more proactive approach by using better fraud metrics In addition to using insufficient metrics to measure the occurrence of fraud, many companies also hamper their fraud-reduction efforts by using the wrong metrics to gauge their success (see Figure 1).

Figure 1. Outcomes Companies Measure as Evidence of Success From Fraud-reduction Efforts

How Can Fraud Prevention Drive Customer Growth

In fact, the most commonly used performance indicator, a reduction in customer fraud complaints, can be deceptive. A large percentage of consumers don’t report fraud in the first place, so measuring a reduction in complaints could miss a substantial part of the customer population that could be experiencing it.

 

Other common performance indicators, such as fewer instances of fraud detected internally and lower expenses attributed to fraudulent activities, suffer from a similar flaw: Unless companies have the right tools and key performance indicators in place to detect fraud, these indicators may not be reliable. For example. fraud attrition could decrease simply due to lower sales volumes. Blanket attempts to control fraud through increased reviews or more stringent processes can backfire by introducing unnecessary friction.

 

A Comprehensive Fraud Management Program Improves the Customer Experience and Drives Growth

Organizations that take a more proactive approach to fraud management tend to devote dedicated, ongoing resources to the issue. Our research found that companies with a proactive approach are much more likely to employ a dedicated fraud strategy team (78%) and conduct ongoing technology assessments (55%) than organizations with a more reactive approach (14% and 32%, respectively) (see Figure 2). These methods are more likely to yield actionable and ongoing performance metrics that identify and accurately quantify the number and type of fraud attacks taking place, as well as the speed and effectiveness of the organization’s response to them.

Figure 2: Proactive Versus Reactive Approaches to Addressing Fraud Management Strategy Gaps

How Can Fraud Prevention Drive Customer Growth Fig2

Leveraging more insightful fraud risk information does more than improve fraud prevention—it also improves the overall customer experience. Just as disconnected efforts to reduce fraud can make it more difficult for legitimate customers to interact with an organization, connected and comprehensive efforts can help companies figure out where they are inadvertently setting up roadblocks for legitimate customers.

"Leveraging more insightful fraud risk information does more than improve fraud prevention—it also improves the overall customer experience. Just as disconnected efforts to reduce fraud can make it more difficult for legitimate customers to interact with an organization, connected and comprehensive efforts can help companies figure out where they are inadvertently setting up roadblocks for legitimate customers."

— Ajay Guru, Partner, Guidehouse Financial Crime Fraud & Investigative Services

“Effective fraud risk management strikes a balance between the necessary level of friction needed to weed out bad actors, while ensuring you provide white-glove treatment to your actual customers,” says Ajay Guru, partner in Guidehouse’s Financial Services practice. By proactively collecting and analyzing data throughout the customer life cycle, companies can build a foundation for better real-time decision-making. To build a more comprehensive fraud prevention strategy, organizations should continuously cycle through testing, monitoring, implementing and orchestrating their solutions.
 
Getting that process right both reduces fraud and introduces the right amount of friction to achieve an experience that keeps customers alert for signs of fraud, while enabling them to complete legitimate tasks efficiently. “When financial institutions master proactive data orchestration, they can more easily maximize the lifetime value of their customers and increase customer loyalty and stickiness across the board,” Guru adds. “When they get that wrong, it leads to customer frustration, churn and missed growth opportunities.”

 

Methodology

This research was conducted online during June 2022. To qualify, the 105 respondents had to work at a bank, in wealth management, for a money transfer, or for a fintech organization. Qualified respondents also had to be at least a key contributor to fraud strategy.

 

About Guidehouse

Guidehouse is a leading global provider of consulting services to the public and commercial markets, with broad capabilities in management, technology, and risk consulting. We help clients address their toughest challenges and navigate significant regulatory pressures with a focus on transformational change, business resiliency, and technology-driven innovation. Across a range of advisory, consulting, outsourcing, and digital services, we create scalable, innovative solutions that prepare our clients for future growth and success.

 

About Arizent Research

Arizent delivers actionable insights through full-service research solutions that tap into their first-party data, industry SMEs, and highly engaged communities across banking, payments, mortgage, insurance, municipal finance, accounting, HR/employee benefits, and wealth management. They have leading brands in financial services, including American Banker, The Bond Buyer, Financial Planning and National Mortgage News, and in professional services, such as Accounting Today, Employee Benefits News, and Digital Insurance.

For more information, please visit arizent.com.

 

Ajay Guru, Partner

Tim Mueller, Partner and Segment Leader


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