How likely are fraud victims to leave their bank?
Rahul Telang, professor of information systems and management at Carnegie Mellon University's Heinz College, joined American Banker’s Editor at Large Penny Crosman for a February 2017 podcast discussing his recent study on the behavior of bank customers impacted by fraud. Tulang’s objective examination uncovered consumer attitudes and behaviors that affect bank customer retention, which he highlighted during the podcast.
His study analyzed the behavior of 500,000 bank customers over a five-year period to observe their response to fraudulent activity on their bank accounts. Of the customers studied, 20,000 were victims of fraud affecting their accounts. In most instances, the bank was made aware of the fraud only after customers called to report suspicious activity. Though incapable of knowing that fraud has occurred until being notified, banks bear the burden of customer displeasure in cases of unauthorized transactions, Professor Telang explained.
Telang compared fraudulent unauthorized transactions to cases of non-fraudulent activity on users’ accounts including merchant error and mistaken or forgotten use by the cardholder or someone in their households. The ability for a bank to determine the cause of an unknown transaction has a major effect on customer confidence, Telang noted.
“A lot of times when the bank in not able to completely figure out why the particular charge appeared, it is in those cases we find that the customers feel they lose – if I can use the word strongly – that they might lose trust in the bank, and we see in the data that they are more likely to terminate the relationship.”
Telang’s study concluded that customers’ likelihood for changing banks increased 3.2 percentage points with a fraudulent experience – a substantial amount considering people naturally deactivate accounts for other unrelated reasons at a rate of 5 to 6 percent. Despite refunding money lost to verified fraudulent activity, many customers remain steadfast in the belief that a bank should be indirectly accountable for their adverse experiences.
However, improved communication could be a key element in retaining customers, Telang speculated. Although the study gathered no detailed information on how the bank interacted with a customer following the fraudulent activity, Telang did advocate for banks taking a forward approach by notifying their users of suspicious and unauthorized transactions.
“Maybe in that case, the customer might feel even more strongly towards the bank, saying the bank is actually being very proactive about their money and their account and fraud,” Telang said.
Based on the study, the price that a financial institution pays for fraud is not all that different in terms of cardholder attitude and behavior towards any business and its potential to damage a reputation beyond repair. In fact, according to a 2016 OnePoll survey of 2,000 consumers, 86.55 percent said they were “not at all likely” or “not very likely” to do business with an organization that had suffered a data breach involving credit or debit card details.
The uncertainty caused by fraudulent activity has a direct and significant effect on customer confidence; banks not only have to compensate for fraud losses but also face customer attrition as a result of that fraud. But by making security investments, as Telang writes in his report, banks have the opportunity to strengthen both customer confidence and retention.
When reviewing such security investments, banks should consider a dispute management solution like Vantiv Resolve. This tool removes the complexity of fraud management for faster, more efficient resolutions, decreasing the dispute lifecycle and improving customer satisfaction. With features designed for simple administration, responsive notifications, and highly specialized guidance, Vantiv Resolve can help ease the burden of maintaining customer retention by maximizing customer confidence.
Although no bank can fully protect their customers against fraud, and switching banks certainly won’t make any account more secure, banks and their customers stand to gain by making safer transactions and by improving procedures to be both proactive and accessible for the user. As Professor Telang said, doing so could “reinforce the positive feelings toward the bank,” which would provide customers with a powerful reason to stay – even in the face of fraud.