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Why Fraud Must Be Treated as a Line of Business – Not Another Operational Cost

Fraud is one of the fastest-growing operational costs for financial institutions (FIs), yet many organizations continue to treat it as just another part of doing business. A recent report shows that every $1 lost to fraud in the U.S., costs financial institutions an average of $5.75. Despite the financial impact and continued growth, many institutions still view fraud as another expense rather than a business function that demands strategic attention.

While financial institutions are experts at managing risk, many still lack the structure and resources needed to proactively address fraud. As fraud continues to accelerate, institutions must start looking for different tools and tactics to challenge their operational readiness and uncover weakness before fraudsters do.

The Financial Industries Fraud Problem

Even with 9 out of 10 FIs reporting a continuous rise in fraud attempts, most organizations still aren’t staffing, measuring, or proactively attacking fraud with the seriousness it demands. Part of what contributes to the challenge is that the industry has no real standard on how they approach fraud and there’s no clear playbook for how fraud is defined, categorized, and tracked. 

Without consistent standards, FIs struggle to understand the true scope of the problem and how to identify trends before they become widespread. The industry’s reluctance to disclose losses also creates another obstacle. Many FIs are hesitant to be transparent and air their “dirty laundry,” making it difficult to learn from one another and recognize emerging threats. 

Pressure for institutions to create more effective solutions is increasing from all sides. Consumers expect immediate reimbursements, insurance carriers continue tightening coverage, and law enforcement tries to close the gaps that have created the environment fraudsters exploit. The industry has spent years reacting to fraud after losses occur, but breaking that cycle will require institutions to start thinking differently, by increasing transparency and reacting proactively.

Implementing Proactive Fraud Strategies

FIs need to start thinking like fraudsters. The industry can’t afford to wait for fraud events to reveal gaps in their defenses. Learning to identify different types of fraud and developing a systematic way to address it needs to be the standard moving forward. 

Like other lines of business, FIs need to invest resources into prevention and implement proactive testing methods. Proven methods like red team versus blue team exercises can help organizations identify weakness in existing processes and systems. 

Social engineering tests and fraud simulations can also uncover gaps in employee awareness and internal controls that may otherwise go unnoticed. This can be simulated both online and in-person. Anonymous controlled simulations where “secret shoppers” attempt to use fake debit/credit cards at locations can expose internal vulnerabilities that exist within staff. The most effective fraud prevention begins when FIs can make sure operations are locked down and thoroughly prepared for any potential threats.

Turn Fraud Prevention into a Daily Practice

Fraud prevention starts at the frontline, with employees. Every day, employees are responsible for spotting unusual behavior, questioning suspicious transactions, and helping protect members. Investing in employee education and technology will help them identify suspicious activity and recognize potential threats in real-time. 

FIs must also empower employees to act when something does not feel right and encourage staff to slow down or delay transactions when concerns rise. While consumers may not always want the extra questioning or delays, preventing fraud is one of the most valuable services FI can protect members and the FIs from losses. 

FIs should also work to increase transparency amongst each other around the fraud trends they are seeing. Sharing information about emerging scams, common tactics, and successful prevention strategies can help organizations identify threats earlier and strengthen their defenses. Fraud prevention is not the responsibility of a single entity. It should be part of FIs daily operation and collective effort across all levels. 

FIs must transform not only how fraud is viewed, but how it’s managed and dealt with across the industry. Establishing clear standards, increasing resource allocation for combatting fraud, and working more closely with law enforcement will help create a stronger foundation for prevention. As fraud continues to evolve, FIs that take a more proactive approach will be better positioned to protect consumers and their own bottom line.

Written by Gino Cayanan

This article is part of an ongoing series written by Noble Credit Union President/CEO Gino Cayanan. Stay tuned for more insights from Gino on topics that impact our members and communities.

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