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The Indirect Cost of Fraud to Banks

Retail banks in Asia Pacific should be worried if they have read the recent survey results of card fraud conducted by Aite Group & ACI Worldwide.  A few warning signs emerged from over 1,800 respondents surveyed across 6 countries in the APAC region.

Card fraud incidences have grown for all countries with the exception of Australia where it has been stable as compared to 2012. China and India occupied the 2nd and 3rd spots, respectively, in terms of highest overall card fraud with 2 in 5 customers witnessing fraud in the past 5 years. These 2 countries also experienced the highest debit card fraud globally; and 4 out of the top 5 countries with the highest prepaid card fraud rate were Asian.

Apart from the direct fraud losses to banks, which in some countries like India have been made responsible by the central bank to prove that the customer has acted fraudulently, there is a much bigger indirect cost of reduced business to the banks that is emerging from the results. Many consumers used replacement cards less frequently—from 33% in Australia to a high of 72% in both India and Indonesia. The higher numbers as compared to their counterparts in the western world resonate with the perception that Asians in general tend to associate risk outward.  Attrition is also high - between 44% and 58% - for China, India and Indonesia. This demonstrates a lack of confidence in the financial institution's ability to ensure that the inconvenience associated with a fraud experience is not repeated in the future.

Use of Replacement Cards in the Asia-Pacific

Considering the impact of attrition as a result of fraud in countries like Indonesia and India, I estimate as much as 2% to 4% reduction in the most valuable customers (after factoring for Pareto's rule). Adding to this, the lost opportunity due to reduced share of wallet and you could be easily looking at several million dollars of lost opportunity. So what can be done?

Thankfully, the survey also explored another dimension - the extent of risky behavior demonstrated by consumers. In each of these countries, except New Zealand, risky behavior and experiencing fraud clearly correlate. Using a quick Chi Squared test, it is easily proven that those who did not engage in risky behavior (like writing the PIN on a piece of paper, or responding to a phishing email) experienced statistically significant lower incidence of fraud. For instance in India, the probability of experiencing fraud was lowered by 30% if consumers did not engage in such behavior.

Risky Behavior and Fraud Experienced in the Asia-Pacific

And hence the significance of the recommendations at the end of the survey, of which I would stress on two - customer education through specific examples and better communication. Consumers have always indicated that they are very keen to participate in the fight against fraud and what better medium to communicate and stay in touch with customers than the two-way interactive messaging technology via the ubiquitous mobile phones!