Identity Fraud doesn't just create costs for FIs…it reduces revenue too!

Identity Theft is top of mind - the cost of making customers “whole”, tracking down and trying recover the stolen money, providing restoration services and more is huge. But recent studies show that the true cost of fraud also includes substantial revenue loss due to account churn.

According to financial market researcher Aite/Novarica, 47% of Americans suffered identity theft in 2020 - costing firms over $700 billion, up 42% from 2019. According to the Aberdeen Group, the direct costs of identity fraud such as Account Takeover on financial accounts can reach 1.9-3.5% of annual FI revenue attributable to consumers. These costs include covering the amount stolen - whether as required by law or due to FI internal policies weighted towards maintain customer trust. They also include paying for teams that are dedicated to recovering the money that has been stolen, and public relations to manage the impact of publicity. But that is just the tip of the iceberg.

Recent studies suggest that identity theft doesn't just increase costs for FIs, it reduces revenue - because a large percentage of online customers switch to a new FI when they've been impacted by identity fraud. Javelin reports that 61% of consumers who suffered “significant financial identity theft” switched financial institutions within 12 months. Aite/Novarica reported that 41% of customers impacted by identity theft moved at least one account to a new provider - regardless of the severity of the fraud impact. And 24% moved all of their accounts!

This isn't surprising. After all, FI businesses are built on trust. Aite/Novarica's study showed that 62% of customers lost faith in the FI's ability to protect their money after suffering account fraud - and two-thirds of those customers moved at least one account to another provider. And the lost revenue is substantial.

The cost of fraud-driven customer churn

Aberdeen's study on Credential Stuffing and Account Takeover in Financial Services reports that 0.72% of retail banking accounts are taken over every year, so approximately 0.3% of customers switch to new banks every year because of fraud. It's important to remember that this revenue is “lost” the next year, the year after, and so on - unless/until the customer is wooed back.

So if the customer is lost for 10 years and the rate of account takeovers continues (and with FI cyberattacks up 238% last year, the rate will likely increase), retail banks will be out upwards of 3% of their annual revenue. And since the marginal cost of customers is very low, they are losing a huge portion of the net income they could achieve every year.

Financial Institutions' response to fraud incidents increased the confidence in the bank's ability to protect their money for nearly 20% of customers impacted by fraud - and convinced them to stay with their original FI. But trying to recover trust after the fact isn't a viable strategy for FIs, when 2-3 out of every 5 customers impacted by fraud move their accounts.

Stop the bleeding - customer financial wellness in the online world

FIs are already pouring money into infrastructure security, and financial identity theft rates are increasing (often driven by consumers' own online behavior). So what can FIs do to fix this problem and build stronger trust with customers so that when an incident does occur, they don't move to another FI?

There is a way to turn all these lemons into lemonade. There is a way to build trust with the customer - before their account is hacked - while also reducing the likelihood that an attack will be successful: help them understand how Online Wellness leads to Financial Wellness, and help them achieve that. And that's the topic for our next blog post.

Aite-Novarica, Javelin Research