What is an Acceptable Level of Fraud?  That Depends.

Javelin and our clients alike have been spending a lot of time lately focused on phrases that have become veritable buzzwords over the last year.  Things like balancing customer experience and security, or maintaining trust.  But there has been one phrase that has been commanding my attention, not the least of which because we are in a remarkable period for crime.  

For the financial industry, no one utters the phrase “acceptable level of fraud” publicly out of fear that it makes it look like they are unwilling or unable to stop criminals.  It is not as though consumers are clamoring to know what happens after they are magically reimbursed for a fraudulent credit card charge. And what about regulators?  They are aware of the losses banks sustain and demand that they institute the appropriate controls.  Yet the notion of instituting controls that are commensurate to the degree of risk – which regulators espouse – still implies a compromise.  If the goal was to stamp out all fraud or other risks, should the controls not be disproportionate?

Forgetting customers and regulators, even within industry there are adherents on either side of the issue.  I understand both positions well.  As a practitioner, I couldn’t stomach any single case of fraud being successfully committed and believed it was my moral duty to crusade within my institutions.  Yet once out from the trenches, it became much easier to consider the business implications of fraud.   

Fraud management is a matter of degrees.  The only way to stop all fraud is to stop all business In which case, everyone loses.  Fraud is a cost of doing business – a budgetary line item and a metric that is managed to.  Executives have to stomach the idea that fraud will happen and place it within the context of other priorities.  No one likes the idea of fraud, but how we determine just how much fraud is acceptable is contingent on our vantage point.

A consumer would say: “The amount doesn’t matter as long as I’m not paying for it or inconvenienced by it”
A regulator would say: “It’s too much when it threatens stability and trust in the institution or system”
A practitioner would say: “There is no acceptable level of fraud”
An executive would say: “We have targets, but we wouldn’t use the term acceptable”

As for me, I recognize that fraud is trending up, but don’t believe we should resign ourselves to the idea that this is the new normal.  Fraud hasn’t been anywhere near contained to the degree that it can be.  In fact, there’s still much we can do to protect our customers, preserve trust, and improve profitability.  It won’t happen overnight, but this level isn’t acceptable because we can do so much better.  Fraud itself is abhorrent and we need to tap into the anger and passion for inspiration to try new things, become more efficient, and develop the right partnerships inside and outside of our businesses.

So, is there an acceptable level of fraud?  Well, that depends on whom you ask.


About Al Pascual

An accomplished industry analyst, market researcher, and financial industry practitioner, Al Pascual is Javelin’s Senior VP of Research and Head of Fraud & Security. As SVP of Research, he oversees the firm’s operations and ensures that Javelin’s research content provides the innovative perspectives that clients expect from the firm.

As Head of Fraud & Security, Al provides clients actionable insights on a variety of fraud and security issues, acts as a partner in developing strategies for managing risk, and identifies and raises awareness of future threats and solutions. Al researches a range of topics, including the applicability of biometrics in banking and payments, the effect of data breaches on the integrity of consumer identities, the relationship between identity fraud and loyalty, and the best methods for securing data and transactions.

Al has presented findings from Javelin’s rigorous, industry-leading research at conferences around the world, including BAI, CARTES, Money20/20, NACHA, and RSA. Al has provided commentary on fraud and security issues to media outlets such as American Banker, Bloomberg, CNNMoney, Fox Business, Reuters, The New York Times, The Wall Street Journal, The Washington Post, and Wired.

Previously Al held risk management roles at HSBC, Goldman Sachs, and FIS. He is a member of the Association of Certified Fraud Examiners, the International Association of Financial Crimes Investigators, and the Federal Reserve Secure Payments Task Force. He earned a Bachelor of Arts degree in History from the University of South Florida.

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