How to Balance Fraud Protection and Customer Friction in a Digital-First World

By Vanita Pandey | 14 June 2016

Today’s consumers rely on digital channels more than ever before to engage with businesses across industries, including banking and e-commerce. For financial institutions specifically, the digital-first world offers an opportunity deliver convenience and create a more compelling and personalized customer experience while decreasing operating costs. However, just as consumers are turning to online and mobile channels, so are fraudsters.

To gain a better understanding of consumer perceptions toward payments security, ThreatMetrix and First Annapolis conducted a study of more than 3,000 consumers worldwide about their digital banking habits and experiences both online and via mobile devices. The findings present new insights into how financial institutions drive digital transformation by leveraging digital identities to reduce friction and build long-term, loyal relationships with customers

Consumers increasingly opt in to digital channels for their financial services transactions

Living in a digital-first world gives consumers more choices: they no longer have to walk into a bank and interact with a teller every time they need to make a transaction and can opt to instead do so online. Of the consumers surveyed, 83 percent have accessed their bank accounts online, and 54 percent have logged in via mobile app. Frequency of online interactions is on the rise, as well. Approximately 70 percent of survey respondents reported they log into their online banking portal or mobile app at least once a week, while 29 percent log in daily. 

Digital interactions offer banks increased engagement opportunities with customers of all ages and lead to a much lower cost-to-serve than branch or call center interactions, which increases revenue.

Fraud is impacting brand loyalty and advocacy

Cybercrime costs businesses like e-commerce retailers and financial institutions a whopping $274 billion a year and is one of the top concerns consumers have when interacting with businesses online. The survey findings show more than half of consumers (55 percent) are extremely concerned about the risk of banking and payments-related fraud. The recent high-profile breaches have the consumer sentiment worse, and nearly half of the respondents (46 percent) indicated their concerns have increased in the past two years. Additionally, four in five consumers (81 percent) indicated a bank’s security reputation as an important factor when selecting a bank.

Perceptions of online and mobile security have a direct impact on brand loyalty and advocacy. Approximately 62 percent of respondents would not recommend a bank to a friend if they experienced fraud on their account. Given that referrals from friends and family are the top reasons consumers choose their primary bank, fraud can have a disastrous effect on new customer referrals.

On the brand loyalty side, younger consumers – who are often the demographic that interacts with financial institutions online the most – are the most likely (18 percent) to leave their bank following an incidence of fraud. When customers choose to switch banks, they take all future revenue, cross-selling potential and referrals with them, causing banks to lose revenue each time they lose a customer.

Friction drives loyal customers away

While cybercrime can have a detrimental impact on financial institutions, fraud attempts make up an extremely small percentage of overall transactions and other activity. In fact, 95 to 98 percent of the transactions are from trusted customers, many of them returning users. Unfortunately, in an effort to detect the small percentage of activity that is potentially fraudulent, businesses often inadvertently inconvenience consumers by making them jump through hoops to prove their identities.

For connected consumers looking to interact with their bank, being “stepped-up” to answer security questions or enter a code sent via text or email adds friction and degrades the experience.  According to the study, 83 percent of online and mobile banking users have faced step-up challenges in the past year. While step-up challenges can keep the fraudsters out, doing so regularly also frustrates legitimate users and can even lead to failed transactions and dissatisfied customers.

When authentic customers fail step-up challenges and perceive their banking interactions negatively, this can lead to a negative impact on the bank. Of those surveyed who had a negative experience with step-up authentication, 30 percent have since changed banks. In the long run, friction can erode customer loyalty and lifetime value, affecting a financial institution’s bottom line.

Lack of effective fraud protection leads to financial losses

With a focus on balancing fraud protection and customer friction, banks and other financial institutions can reduce fraud losses, avoid increased operating costs and minimize the loss of customer relationships – which combined cost U.S. banks nearly $15 billion in lost relationship value each year.

To do so, businesses should take a holistic approach to digital security that takes into consideration all digital channels and users’ full digital identities that evaluate potential fraud. Financial institutions would also benefit from investing in real-time fraud prevention technology to be as quick and accurate as possible when identifying and responding to fraud attempts. This will not only decrease overall fraud, but ensure valuable, legitimate customers aren’t inconvenienced in the process. Finally, as with any business strategy, financial institutions – and digital businesses across industries – should constantly evaluate and update their security strategies to stay one step ahead of sophisticated, ever-evolving cybercriminals.

By Vanita Pandey, Vice President, Strategy and Product Marketing, ThreatMetrix.

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