Newsflash: payment card fraud continues to increase. According to the Nilson Report, global payment card fraud losses totaled $32.34 billion in 2023. To put that enormous amount into some context, that’s about the GDP of El Salvador. Meaning, a tremendous amount of money is taken from banks, merchants, and individuals every single year.
But why should the fraudsters have all the fun, and the profit? What if there was a way to drastically reduce losses due to credit & debit card fraud while increasing revenue at the same time?
Banks and other financial institutions may not know this, but there can be a hefty ROI (return on investment) when it comes to fraud protection. By investing in the right fraud prevention measures, everyone can come out of this a winner… except for the criminals.
Let’s dive into the ROI of fraud prevention.
Why Banks Need to Think About the ROI of Fraud Prevention
The Nilson Report, among many (many) others show that all types of fraud are increasing, especially card-not-present (CNP) fraud which has been growing lockstep with the boom in ecommerce. Of course this is bad for bank customers, but due to the zero liability clause of most banks, it’s the financial institutions that eat the cost of the losses.
And the cost of the losses isn’t just the amount lost to fraud. According to a study by LexisNexis, every dollar lost to fraud costs US banks $4.41 due to the various associated costs of dealing with fraud cases.
When banks have to shell out the 4.5X the cost already lost to fraud, there is a huge problem here. And yet, banks have been slow to address the issue. Remember, fraud has been on the rise for years now. Banks seem to be only paying lip service to the issue, and not addressing the problem head-on.
But customers won’t tolerate getting scammed much longer. Zero liability is one thing, but having fraud occur at all is a giant hassle – think credit monitoring, credit freezes, waiting for new cards, etc. And keeping clients happy should be a top priority for any financial institution.
However, there are many more ways to earn high ROI by investing into fraud protection.
Cost Saving: Minimizing Fraud Losses
It’s estimated that in the US alone, financial institutions and merchants lost roughly $12 billion to payment card fraud in 2021.
Now, let's be generous and say that fraud prevention programs only prevent about a third of those losses. That's still around $4 billion that could have been saved in 2021. There are about 4500 banks in America, and if those savings were evenly divvied up between them, that would be more than $880,000 saved for each bank, annually. Of course, this distribution isn't even, so smaller banks with high instances of fraud stand to see a higher ROI from fraud prevention efforts.
The first, and most obvious, return of your fraud protection program’s ROI is a measure of how much it saves you in fraud losses.
Cost Saving: Cutting Fraud-Related Expenses
Another vital measure of your fraud protection program’s ROI is how much the program saves you in fraud-related costs.
As mentioned earlier, research from LexisNexis found that that every dollar lost to fraud ultimately costs North American banks more than $4, due to the costs of hiring fraud experts, implementing fraud monitoring services, replacing compromised cards, and more. It’s that old adage: an ounce of prevention is worth a pound of cure.
Now imagine that average of $925,000 saved from the previous example. Multiply it by four, and you get 3.7 million: the (hypothetical) amount per year that each bank stands to save with an effective fraud prevention program. The savings also extend to reduced cost of logistics and by helping bank fraud investigation departments be more efficient with lower amounts of fraud to track down overall.
Cost Saving: Lost Customers Due to Bad Branding
Remember the Wells Fargo scandal in 2016? Are you surprised to learn that, 8 years later, the bank’s brand health is still feeling the effects of this negative press?
According to a Deloitte survey, 87 percent of executives say that a risk to their brand’s reputation is more serious than any other type of strategic risk. These executives reported that, after their brand suffered a negative reputational event, their businesses’ biggest impact areas were revenue, brand value, and regulatory investigations. In fact, a study from ECGI showed that stock price reactions to a public company’s negative press were, on average, 9X larger than any FSA financial penalty the company suffered. Finally, research shows that even one negative review can lead to losing as many as 22% of customers. What does all this mean? Branding matters—a lot.
Being associated with fraud can directly lead to negative branding for banks, which can in turn lead to customer churn and other negative consequences. Fraud protection should improve this branding as a part of its ROI.
Revenue Stream: New Customer Acquisition
Investing in fraud prevention can also bring the added benefit of attracting new customers. 69% of consumers consider good fraud protection as a top three consideration when choosing a financial provider, and banks can use this to gain customers, adding to their return on investment. After all, when customers are fed up and leave a bank, it’s not like they forego payment cards altogether. One bank’s loss is another bank’s gain.
The average LTV (customer lifetime value) of a bank customer is about $4000, and banks spend hundreds of dollars just to get new customers through their doors. Therefore, if a fraud prevention measure costs, say, $100,000, it needs to attract just 25 new customers to break even.
Other Additional Revenue Streams
Let’s look at a real-world example of the ROI of a fraud prevention product. Ellipse Verification Code (EVC)is a technology that equips payment cards with a dynamic security code. A dynamic security code is a security code that changes with every “tap” or “dip” transaction, or when triggered with an app. This changing code keeps fraudsters from stealing the card’s full information.
EVC adds a unique factor into ROI calculation: a brand-new, recurring revenue stream. An FIS survey showed that customers are actually willing to pay for a card like EVC, to the tune of $1-$2 a month:
Source: FIS Survey 2022
This directly translates into more revenue for the bank. Not to mention that EVC’s power to reduce rates of false declines means more interchange revenue from legitimate transactions.
The Bigger Picture of the ROI of Fraud
Calculating the ROI of your fraud protection program helps you define your business’s goals and answer essential questions. For example, some may think a business’s main goal should be to eliminate all fraud. But that’s not always realistic or even desirable. Some companies may opt to absorb a certain amount of fraud losses because they’re focused on growth and don’t want to disrupt their operations or customer experience with harsh security measures. If these companies don’t have their finger on the pulse of their fraud prevention’s ROI, they may make choices that don’t work for their situation. Calculating fraud prevention ROI helps a business strike the right balance and clarify its priorities-because fraud prevention has to be part of a bigger picture. Newer fraud-prevention products like EVC are made with this truth in mind.
Fraud is a growing concern, but with the right strategies, your business can establish effective prevention strategies without sacrificing its bottom line. The key is ensuring that fraud prevention efforts offer a strong return on investment. After all, if fraud prevention doesn’t have a high ROI, it’s a wasted opportunity for your business.
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