The Value of Fraud Prevention

Fraud prevention is vitally important to the well being of financial institutions of all sizes. If you don't believe that you haven't been paying attention.

Just fifteen years ago, only the larger financial institutions had to be concerned with fraud; many smaller ones "knew their customers” and didn't experience fraud. The world is really changing" Individual fraudsters, fraud rings, even bad employees are no longer solely the problem of large financial institutions. Recent ABA studies have shown that fraud is steadily moving into smaller banks, perhaps in part because large banks have implemented so many fraud prevention systems. Smaller banks and credit unions are largely unprotected, and with an emphasis on deposit growth, may unwittingly let fraudsters in along with good new customers.

So what is the value in fraud prevention? It takes many forms and varies greatly depending on the size of the institution. With many large banks now using an industry database to prescreen applicants and avoid hiring each others' bad former employees, where do you think all those thieves are going to look for work? Their skills are in financial services, so small institutions beware! What's more, smaller banks and credit unions are at greater risk if hit with a multi-million dollar loss, be it internal or external fraud. Due to their size, they just can't recover from such a loss as easily as larger banks.

Although, large banks can ill afford extraordinary losses such as these either, especially in this economy. And, yet, all it takes is discovering one lender who has been lapping loans for years, a rash of large undetected counterfeit checks, a burst of stolen or counterfeit convenience checks for your home equity lines, a spate of account takeovers, or a collusive ring to target your credit card portfolio with a bust-out scheme to incur multi-million dollar losses this week. I've heard the following a lot, "For the last four few years we keep getting hit with extraordinary losses". When does extraordinary become ordinary?

So what is the value of fraud prevention? Detecting fraud in a timely manner means far lower losses. It means ridding yourself of a bad employee before losses run to the thousands, let alone millions. Detecting counterfeits, collusive networks, etc., before value transfer means avoiding losses entirely or incurring minimal losses. There's an old saying that "preventing losses is far easier than chasing money that has already left the bank". It's also more economical – fewer cases mean fewer investigators trying to recover funds that have left the bank. Working fraud alerts is far more efficient than conducting long, drawn out investigations. It results in better customer service when you proactively protect accounts against fraud. It means lower attrition because customers who have experienced fraud on their accounts (even though you made them whole financially) have lost confidence in your bank, and leave for another institution.

The value of effective fraud prevention has many components... lack of fraud prevention leads to enormous risk.

Do you agree? Please share your perspective.

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