Sep 14, 2016 Walt Wojciechowski
It's a question that warrants an answer: How much does financial fraud cost your business? The Association of Certified Fraud Examiners estimated the average organization loses 5 percent of its revenues to fraud, but your business could be losing more depending on the risks it needs to mitigate.
Different types of fraud pose distinct losses. For example, identity theft does not affect your business in the same manner as money laundering schemes. In addition, you may lack background screening tools and bank verification and aggregation solutions that help you identify fraudsters.
"31% of fraud attempts were successful in 2016."
Costs to U.S. merchants
For all intents and purposes, the best you can do is reference industry research detailing the costs of particular financial crimes and then weigh the likelihood of your organization falling victim to such schemes.
The retail sector is no stranger to fraud, whether it involves fake checks, stolen payment card details or some other kind of identity theft. Unfortunately, B2C enterprises are encountering higher rates of fraud now than they were in years previous.
A study from LexisNexis confirmed this, discovering fraud accounts for 1.47 percent of revenues - up from 1.32 percent in 2015. For every dollar a merchant loses to a financial scam, it actually incurs $2.40 in fees, chargebacks and merchandise replacement.
The research also noted the number of attempted fraudulent transactions have been increasing steadily since 2012. For example, in 2013, retailers encountered 276 fraud attempts per month on average, 32 percent of which were successful. This year, merchants experienced 648 financial scams on a monthly basis, and 31 percent of those behind such efforts achieved their goals.
Calculating losses, establishing defenses
Estimating how much a fraudulent transaction costs your business often entails contracting a certified fraud examiner to assess the impact on specific processes. Kount listed nine expenses directly tied to financial scams, several of which are listed below:
- Manual reviews involve employees reviewing orders and transactions.
- DIY systems are solutions designed to prevent fraud, and are often implemented as needed.
- Declined orders entail merchants turning away legitimate transactions based on signals that indicate fraud.
- Shipping expenses are irrecoverable, because merchants have already paid for deliveries.
- Chargeback fees and fines may cost anywhere between $15 and $100.
- Wasted labor pertains to any complaints, audits and representments that distract staff from engaging in profitable activities.
Analyzing these and other factors reveal the risks specific to your operations, enabling you to prepare for specific types of fraud. Acquiring accurate knowledge is the first step towards reducing the chances of your organization falling victim to financial crimes.
There are also plenty of tools you may integrate into your operations to identify fraudsters. Machine learning and predictive analytics are two technologies that are growing more accessible and sophisticated. Harnessing trend analysis algorithms, predictive analytics solutions are designed to spot anomalous behavior, alerting companies to possible fraud suspects.
Another fraud reduction option involves implementing Instant Bank Verification, which confirm whether specific accounts belong to the customers using them. In addition, they collect data regarding consumers' financial obligations, income, direct deposit accounts and other properties, providing staff and analytics solutions with the information they need to make intelligent decisions.