MINNEAPOLIS, Minn.—A new study indicates that financial institution fraud prevention costs are exceeding actual losses for many payments types.
The finding, from the Payments Fraud Survey conducted by the Federal Reserve Banks of Minneapolis, Boston, Chicago, Dallas, and Richmond during April and May 2014, suggests banks and credit unions should evaluate security investments in relation to the overall cost of payment fraud to the FI.
The study indicated that while the finding could suggest that financial institutions and companies are “overcompensating in prevention vis-à-vis likely losses, it is also possible that risk mitigation strategies and fraud prevention investments have indeed been effective.”
Financial institutions are particularly likely to perceive that risk mitigation strategies have led to a decrease in fraud losses, with 71% saying they agree with that statement, compared to only 33% of non-financial firms. More than half of the respondents (60%) whose losses increased or stayed the same report that risk measures taken helped to control the level of losses.
Financial institutions are also heavier users of customer authentication methods than non-financial firms, the study noted. “For example, almost all (92%) of surveyed financial institutions use multi-factor authentication, while only 35% of non-financial firms do so. Financial institutions are also more likely to use a variety of transaction screening and risk management methods than non-financial firms, according to survey results,” the report stated.
Although many respondents experienced fraud attempts and losses, in 2013 one out of five (21%) financial institutions and one out of two (54%) non-financial firms did not incur losses, suggesting effective measures were in place preventing the successful use of compromised payment instruments and information, or possibly the fraud attempt was relatively unsophisticated.
“Indeed, the data shows that companies are investing increasingly in fraud prevention, mitigation, and control,” the report stated. “These investments should be taken into consideration when evaluating the overall cost of payment fraud to individual companies and to the economy as a whole.”
The biennial survey, started in 2009, seeks to uncover fraud trends for a variety of payment types, including checks, cash, debit and credit cards, automated clearinghouse (ACH) transactions, and wire transfers. Respondents are asked to describe types and levels of fraud and also to highlight effective fraud mitigation strategies.
In keeping with previous surveys, signature debit transactions are the payment type cited by the largest number of financial institutions as accounting for high levels of payments fraud losses (92% of financial service companies), while checks are cited by 75% of non-financial companies.
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