Are the ABA loss numbers way too low?
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Fraud impacts all financial institutions. Large sources of capital attract fraudsters and thieves intent on stealing the money, wherever it is- Auckland or Oakland, Riyadh or Raleigh. We all know fraudsters are targeting financial institutions. But how much do they get away with stealing each year? It's hard to assess the size and scale of the fraud problem in a systematic manner-even for industry professionals working to stop fraud.
The closest I have seen to a comprehensive report is the 2007 Deposit Account Fraud Survey put together by American Banker. This U.S.-focused bi-annual report offers us a great lens for understanding the threats and challenges facing loss-prevention groups. The qualitative insights are great, but the quantitative loss numbers just don't add up. According to the 2006 survey (report year 2007) U.S. banks lost just under $1 billion to deposit account fraud. That sounds like a big number. But some quick back-of-the-envelope calculations suggest the number is low:
- The FDIC lists over 8,000 banks in the U.S. This means that the average institution loses $125,000 per year to Deposit Account Fraud. This strikes me as extremely low given the amount of fraud committed in the United States. Large, super-regional banks could easily incur this level of loss each day.
- An LA Times article from 2000 highlights an 8-man check fraud ring that stole approximately $100 million per year from 1996 to 2000. Even using the 2006 total loss numbers and not those from 2000 (which were much lower) this 8-man crew would account for 10% of all losses. That just doesn't seem possible.
- According to a Javelin Strategy and Research study, identity fraud losses were $45 billion in 2007. New account fraud losses on checking and savings accounts opened with the intent to commit fraud were $1.92 billion. This estimate doesn't even count existing deposit accounts and it's already twice as high as the ABA loss estimates!
So what are the right estimates for the size of the fraud problem? In any survey, there is an incentive for the respondents to provide answers that align with their goals. Did loss professionals responding to the ABA survey lowball the numbers? As an industry, how can we agree on fraud loss estimates that more accurately define the problem facing our institutions? Let me know what you think.