Blog » 2016 » May » How Digital Fraud Trends Affect the Financial Industry

Posted on May 18, 2016 9:10am PDT

In the digital age, change is the only consistent thing anyone can rely on. The financial industry has experienced major shifts in the last year, thanks to numerous digital trends. The rise of mobile payment apps, for instance, are driving customers to using their cards less and less during daily life. At the same time, card technology is making face-to-face transactions increasingly safer with the adoption of EMV technology.

With so much change, it can be difficult to track the impacts of new technology and how they affect customer behavior and fraud. As a result, even enhancements can lead to new challenges. In this post, we take a look at a few effects that have taken place in just the last few years.

Where It’s Leading (Right Now)

The good news is that EMV technology, chips, and PINS have overall led to a great deal of fraud prevention when adopted. According to a study1 from the Aite Group in Canada, based upon data from the Canadian Bankers Association, the use of EMV technology correlates to a 54% decrease in offline fraud. This serves as evidence that in the U.S., face-to-face transactions will continue to become safer as more merchants adopt “Chip and PIN” – although many at this point have only adopted “Chip and Sign”, deterring fraudsters from creating counterfeit cards, but not necessarily deterring them from using stolen cards.

Here’s the bad news, going back to the Canada example: the overall level of fraud never went down. Why? Because thieves simply moved where the money was easier to steal—online, or Card Not Present (CNP), transactions, where EMV does not impact the transaction. The same study found a 133% increase in online fraud. It’s safe to assume that when other methods of fraud become more difficult, thieves simply shift tactics.

However, EMV isn’t entirely to blame for the shift. Consumers are spending $700 billion a year online—and that’s just in the United States. Worldwide, online shopping amounts to $1.47 trillion on an annual basis. As a result, financial institutions are required to beef up their cybersecurity measures far more effectively in order to combat fraud.

In short, money, spending, transfers, and other major financial behaviors are moving online, where they are increasingly vulnerable to fraud—while fraud is also driven online by safer offline practices.

Why Online Fraud Prevention Is Vital to Your Reputation

As the world moves online, a financial institutions’ reputation will be built less on its brick-and-mortar service, and more on its ability to protect online assets and provide a high quality digital experience. Organizations looking to dominate the 21st century will need to employ more and more sophisticated practices to ensure the safety of their customers’ money—and the organizations' ability to attract new customers and prevent migration.

A study from the International Journal of Bank Marketing noted that fraud was more than just an inconvenience for a customer.

One instance of fraud, even if the money is reimbursed, led to feelings of insecurity, lack of trust, and increased dissatisfaction with the bank. Inability to prevent fraud even stimulated the loss of customers to other banks.

On the positive side, perceived security was a major asset when it came to attracting new customers – and banks have been pouring resources into their mobile apps and digital experience for many years now.

What Organizations Can Do to Protect Consumers

While systems will differ based on the needs of each institution, there are fraud-prevention principles that are easy to overlook during seasons of intense shifts in the landscape. Here are two ways organizations can better protect their consumers, build goodwill among their customer base, and maintain customers through strong security measures.

#1: Use Multi-Factor Authentication

The use of multi-factor verification will allow your organization to add stages of security to cover for the vulnerabilities of online transactions as well as in person transactions (e.g. higher risk requests such as name changes, travel advisory notices via customer service). Ultimately, even the most secure system is not as strong as multiple layers of verification. Rather than putting your security “eggs” in one basket, diversify your gatekeeping capabilities—it demonstrates value to consumers while ensuring that thieves will not have an easy way to find vulnerabilities.

#2: Communicate Frequently

This is likely the most important principle—frequent communication with customers will ensure that strange behavior or large changes are addressed and verified directly. This will engender more trust in your organization, especially if it leads to preventing a fraudulent transaction. It communicates your vigilance while building goodwill, but more importantly, it gives your customers a chance to immediately address any potential fraud.

In the end, as fraud becomes more sophisticated and shifts its patterns to address new vulnerabilities, the financial industry will shift alongside it. And, of course, when the day comes that online fraud will be more difficult than offline fraud, financial predators will make their great shift once again.