On average, organizations lose 5 percent of their annual revenue to fraud each year, according to a report from the Association of Certified Fraud Examiners (ACFE). Common risk management practices are often insufficient when it comes to preventing fraud. As a result, companies are turning to fraud risk management to protect their bottom line and meet their risk compliance objectives.
As the burden of regulatory compliance increases, it is critical to understand where your organisation is vulnerable and establish the appropriate risk management framework to identify and respond to fraud. By proactively assessing risk and predicting outcomes, businesses can transform fraud risk management into a competitive advantage.
Benefits of Fraud Risk Management
Organizations that establish robust fraud risk management practices can experience several benefits, including:
- Reduced financial losses due to fraud
- Reduced costs of responding to fraud (investigations, legal costs, and regulatory enforcements)
- Improved compliance with local and global regulatory requirements
- Improved ethical culture across the organization
- Improved employee awareness of and response to fraud
- Increased reporting of potential frauds and other ethical issues
- Improved corporate governance and higher governance ratings
Best Practices for Fraud Risk Management
Organizations need to eliminate unnecessary complexity by starting at the top, rather than look for incremental approaches that only reinforce their current model.
1. Invest in the right technology
Technology can help you achieve higher levels of maturity faster. Integrated ERP and risk management solutions that are cloud-based and mobile-ready ensure simplicity and ease of adoption. Cloud-based risk management solutions improve collaboration and insights, automating and streamlining risk management workflows for greater efficiencies.
2. Create the right risk insight and culture
Organizations can gain immediate benefits from risk insight that can improve management decisions. However, in order to maximize the long-term benefits, they need to take a systematic approach to embed risk awareness and continuous compliance in their financial processes.
3. Evaluate your compliance capabilities
Strong compliance provides both broad business and companywide benefits. Business leaders need to identify their company along the compliance maturity model. Understanding the journey helps organizations understand the best approach and the right conditions to move to the next level.
4. Ensure that the solution is flexible
As incidents of fraud continue to increase on both existing channels and new channels (such as social media), finance leaders must strengthen their detection and analytical capabilities. Organizations need to leverage the existing data at their disposal to improve their fraud risk management capabilities. Challenges are getting increasingly complex, making it necessary that your risk management solution be extensible and agile with respect to accommodating new channels.
5. Consolidate all data sources on a single platform
With the increasing number of solutions that bring additional fraud detection capabilities, businesses must ensure that data from all of these vendor sources is integrated into a single platform for analysis and decision making. This will avoid the creation of data silos, which create opportunities for fraud.
6. Take an omnichannel view of fraud detection
Organizations must include all digital channels in their fraud risk management strategy, providing an omnichannel approach to fraud detection. This minimizes the risk of a fraudster simply migrating to one channel after being blocked on another. This also requires developing a single centralized platform to ensure that data points and behavioral patterns can be correlated across all channels.
7. Evaluate risk across the customer journey
The risk level associated with a transaction must be assessed and handled before the customer reaches the point of payment. Risk management leaders must create a fraud risk management system that can assess risk from the very beginning of the customer journey. This includes assessing behavior, evaluating the likelihood of bots or scripts being used, monitoring account login or creation, and defining the risk of the action being carried out. They also need to implement appropriate obstacles along the journey based on the level of the perceived risk.
8. Deliver a seamless customer experience
Many organizations take a one-size-fits-all approach to fraud risk management, with all customers being forced to overcome the same obstacles to establish trust. A new approach is required that can integrate fraud detection and authentication technologies into the customer journey while causing minimal inconvenience to the customer. Risk management leaders should focus on simplifying the customer experience, and implement frictionless customer authentication into their processes and to meet regulatory obligations.
9. Focus on reducing the total cost of fraud, not the fraud rate
In order to build an effective fraud detection strategy, organizations must first quantify how much fraud is costing their organization. This will lead to informed discussions about how much to invest in detecting and preventing fraud, and how best to align a fraud strategy to organizational goals. The primary goal of the fraud detection strategy should be to minimize the total cost of fraud.