Measuring the True Cost of Fraud

What’s the cost of fraud?  

Financial institutions typically confront the true cost of fraud only after a loss event. Until the dollar figure of a major incident is staring someone in the face, it’s hard to grasp the real impact and cost to the institution. 

But the number that financial institution leaders typically focus on – dollars lost – isn’t the whole equation. The real costof fraud includes a range of factors your institution likely isn’t counting.  

The threat landscape just got bigger 

Everyone in our industry understands that fraud is a growing issue. Projected AI-enabled fraud losses are estimated to hit $40B in the U.S. by 2027​, a 32% CAGR from $12.3B in 2023​. But if a major fraud event hasn’t happened to your institution, it’s easy to assume that basic fraud protection measures are doing their job. 

This is especially true for smaller banks and credit unions, which have historically seen less of this activity than their larger counterparts. Fraud has traditionally followed account-holder volume: fraudsters find a tactic that works and apply it at scale, a strategy that favors targeting institutions with the largest account bases. Brute-force tactics pay off in proportion to how many account holders fraudsters can try them against. 

Now, artificial intelligence is quickly making advanced fraud tactics cheaper and easier to pull off. Large language models can write convincing social-engineering emails and build realistic replicas of banking portals, which means that institutions of every size are viable targets today, not just the largest ones. 

The hidden price of fraud 

While visible costs of fraud are on the rise, there are also hidden costs to factor in when plotting your fraud prevention strategy. In talking with our customers, we find that fraud costs stack up in three main functions: 

1. Manual workflow cost: Financial institutions often tell us they don’t need to invest in advanced fraud technology, because they’ve staffed up to handle the problem. But that staffing is a cost that often goes uncounted. And itexplodes when overly sensitive models generate a high rate of false positives, adding review hours without stopping any real fraud. As a result, banks and credit unions are often forced to hire on additional staff, or pull staffers away from other, revenue-producing duties, to focus on fraud instead. 

2. Disabled features and functionality: Many digital banking capabilities (Zelle, bill pay, self-service profile changes) get restricted because of fraud concerns. Limiting these features suppresses revenue and adoption, adding to the cost of fraud and hurting your institution’s overall profitability. Restricting self-service options also tends to reroute that activity to the call center, a channel that’s more vulnerable to social engineering than the digital flow it replaced. The result is a double loss: profitability and adoption go down, while the fraud gets diverted instead of stopped. 

3. Relationship and retention risk: Fraud not only spooks your institution, it spooks your account holders. After a fraud event, customers often switch financial institutions, because they feel their bank or credit union didn’t do enough to protect them. Over time, this churn adds up to a significant loss of assets and real reputation risk. The stakes are higher with large commercial clients carrying a bigger deposit base than a typical retail customer, which is why some institutions choose to absorb the cost of a commercial fraud event rather than pass that burden on to a high-value relationship. 

The LexisNexis True Cost of Fraud study, which shows that for every $1 of fraud loss, the cost to the institution is $5.75. Financial institutions sometimes argue that number is inflated. They say they’ve already staffed around the problem and don’t need advanced fraud technology to do the heavy lifting. They’re actually proving the study’s point. That staffing is a cost, just an often uncounted one. 

What financial institutions gain when fraud defense works 

The cost of a fraud event extends throughout your institution, but the flip side of that is just as true. Strong fraud prevention doesn’t just stop losses, it builds value in places you’re not currently measuring. 

First, strong fraud protection strengthens the relationship between your account holders and your institution. When retail and commercial customers feel protected, they’re more likely to stay, and more likely to refer others. 

It also changes what your digital banking team can offer. An institution with strong fraud controls can turn on higher-risk features instead of restricting them, such as raising limits on Zelle and ACH transfers. Fraud prevention becomes a foundation for the digital experience instead of a ceiling on it, opening up revenue your institution isn’t currently capturing. 

Lastly, fraud defense is moving away from any single institution fighting its own fraud in isolation, toward solutions that learn across many institutions at once and surface a risk pattern before it reaches your bank or credit union. Manual workflows confined to one institution can’t do this. A proactive, technology-driven approach can, multiplying the benefit across every institution in the network. 

A checklist for the real cost of fraud 

The most convincing case for fraud prevention spending rarely comes from a vendor. It comes from inside the institution, usually from whoever is closest to the manual work, the moment they run the numbers themselves. Before evaluating any fraud solution, turn that same scrutiny on your own cost picture first. Here are the questions worth asking: 

• The current loss figure: What does our reported fraud-loss figure actually include, and what does it leave out?  
• Restricted features. Which digital capabilities have been dialed back for safety, and what has that cost in adoption or revenue? 
• Call center volume: How much fraud-driven activity is being rerouted to the call center, and have we assessed that channel’s exposure to social engineering?  
• Invisible value: When a fraud solution is working, are we actively measuring the potential losses it’s preventing, or only noticing it when someone asks why we’re still paying for it?  

Working through this checklist will surface the true cost of fraud for your institution and give everyone the same basis for deciding whether fraud investment needs to scale. 

What invisible value looks like in practice 

The last question in that checklist, whether anyone is measuring what a fraud solution prevents, is the hardest one for an institution to answer. Unfortunately, the answer usually only shows up in hindsight. 

Consider the story of a community bank that had run a fraud solution for years without it ever flagging a real incident. During a routine contract renewal, the bank seriously considered dropping it. The solution cost money every month, and in all that time, it had caught nothing, because there had been nothing to catch. 

The bank kept it anyway, on a simple piece of logic: It would only take one real incident for the investment to pay for itself. Not long after, that logic was confirmed. Fraudsters had already impersonated the bank’s own fraud department to convince a customer to share a one-time authentication code during a live login. Using that access, they attemptedto move money to accounts the customer had never paid before, dressed up to look like routine business payments. The same rule that had sat in the background for years, flagging any payment to an unfamiliar recipient, caught it, saving hundreds of thousands of dollars. Days earlier, it had been an internal debate about whether a fraud solution was worth its cost.  

Fraud prevention, recalculated  

Fraud is no longer a cost that financial institutions can afford to measure narrowly. As AI lowers the barrier to entry for attackers, institutions of every size, not just the largest, are now exposed to schemes that used to be reserved for the biggest players. A financial institution that only counts what fraud takes from it will always underprice the value of stopping it.  

Our most successful customers have stopped treating fraud cost as a single line and started treating it as the sum of everything fraud touches: the labor, the restricted features, the relationships, the missed revenue, and yes, the losses. 

Just as those costs compound when they go unmeasured, the benefits of proactive fraud prevention compound too, in stronger relationships, in features an institution can finally turn on instead of off, and in a defense that gets smarter every time another institution in the network gets targeted. 

To hear more about how banks and credit unions should be calculating the cost of fraud, listen to HD Jacobs on the Purposeful Banker Podcast presented by Q2.