Imagine perpetually working hard to maintain a perfect credit rating only to have a fraudster steal your identity and get approved for a business loan. Then, you only accidentally find out when you happen to glance over your credit report history.
This is what happened to credit and finance expert Gerri Detweiler, and not just once. There have been several instances of identity thieves leveraging Detweiler’s impressive credit reputation to successfully apply for credit cards and stimulus benefits.
We often hear about such things yet never think they could happen to us. But identity fraud is very common, and it doesn’t just happen to victims with an online following.
A 2020 report found that in the previous two years, 47% of surveyed U.S. consumers experienced identity theft, 37% experienced application fraud, and 38% experienced account takeover. This same report estimated that identity-related losses increased by 42% between 2019 and 2020.
These alarming stats suggest that identity theft isn’t just a prevalent problem — it’s continuing to grow. So, if you don’t implement precautions now, you may become the next victim.
This isn’t breaking news. From my extensive experience in dealing with business fraud, I have found that most business owners feel fraud is an imminent threat. Still, they keep pushing aside the pursuit of prevention controls because the process is perceived as being too complicated, expensive, and ineffective.
But an effective solution does exist, and its implementation is not as scary as you think.
Weighing the Fears of Investment Against the Fears of Fraud
Over the past year and a half at my company, I have found that most businesses are hesitant to implement fraud protection strategies because they can be very expensive. One report found that the average cost of fraud mitigation is $50,000 a year for a small business and upward of $3 million a year for an enterprise. This presents a significant barrier to even considering fraud prevention safeguards, especially if you’re a small- to medium-sized business with a very limited budget.
Business owners also tend to hesitate due to the fear of reputational damage if news of a major fraud event were to go public. In 2018, Facebook suffered a major reputational blow when it was revealed that Cambridge Analytica stole private data linked to 50 million Facebook users. This event, coupled with several fake news allegations, caused the tech behemoth to suffer the largest stock market value drop in history: $120 billion.
But frugality and the possibility of a bruised reputation aren’t the only reasons driving hesitancy. Many of us may be afraid of the truth that could be uncovered through fraud prevention efforts. We could find out that some of our employees, or even business partners, are stealing money behind our backs, or our eyes could be opened to just how much our businesses are losing due to mismanaged data protection processes and a lack of fraud prevention software.
How do you respond when confronted with information like that? The answer isn’t easy, but allowing fraud to continue is definitely the wrong response.
The Danger of Overcommitment
There are few concepts in business as polarizing as fraud prevention. When standing at such a crossroad, organizations usually choose one of two extreme directions. They either completely dismiss the notion or overcommit to the point of suppressing business growth.
The most damaging example of such behavior is redlining, which is the practice of preventing certain neighborhoods from accessing financial and business services because of implicit bias. This abhorrent behavior is driven by very myopic fraud mitigation logic that automatically classifies neighborhoods with high crime rates as extreme financial risks. Such a binary fraud classification system isn’t just vial and discriminatory. It also disqualifies potentially wonderful candidates that could help a business flourish.
When off-the-shelf fraud prevention software is implemented without the council of fraud mitigation experts, a similar rigid classification system is achieved. How do you normally configure new security software? Do you take it easy and limit the protection settings? Probably not. It’s more likely you turn all the knobs and levers up to their maximum security settings.
Such an impulse might feel like the appropriate security response, but in many cases, it results in the same outcome as redlining: the disqualification of potential customers based on algorithmic bias. This behavior could end up causing the very reputational damage you’re hoping to avoid by using the software.
I recently had a very frustrating experience while trying to sign up for an online crypto service. During the identity verification process, I kept getting unnecessarily penalized, despite all of my answers and submitted documentation being accurate. This particular solution had significantly overset their security tolerances to the point of preventing me from becoming a customer. Because of this, I ended up signing up to their competitor, which verified me instantly.
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Cybercriminals Love Rigid Security Systems
Another lesser-known impact of a highly-rigid fraud prevention system is that it actually plays into the tactics of cybercriminals.
If your fraud prevention controls are too strong, they’re predictable. Not only are you preventing legitimate transactions but you’re also involuntarily teaching cybercriminals how to break into your internal systems.
The underlying reason behind the rigidity of many fraud prevention solutions is that they’re developed to contend against a digital adversary. But fraud is not initiated by a static digital adversary. To significantly improve your chances of mitigating fraud, prevention strategies need to be geared toward a dynamic adversary. One that breathes, thinks, plans, and problem-solves — a human.
The costs of such an investment are minimal compared to the potential losses due to fraud that could be eradicated. According to a 2020 study, organizations lose about 5% of their revenue to fraud every year. For many businesses, this amount far surpasses an investment into a fraud prevention program.
It’s OK To Fail
In a world where fraudsters are continuously striving to improve their tactics, it’s unrealistic to burden yourself with the expectation of always having the right answers for every situation. This will only result in burnout before any of the vulnerabilities facilitating fraud are addressed. The upside of fraud being a widespread problem is that you’re not alone in this fight. There are plenty of tools and solutions developed to help business owners strengthen the maturity of their protection strategies.
While it may be tempting to just Frankenstein a series of fraud solutions together to address each of your skills deficits, it’s likely not the ideal approach. According to a 2020 study by Gartner, organizations that implemented facial recognition software to address fraud still demonstrated demographic bias in their performance.
So, software solutions alone are unlikely to give you the best return on your investment. Instead, these solutions should be complimented with industry experts that understand how to correctly interpret and respond to the data they surface.
Such an invaluable support network will help remove any self-inflicted pressure to rapidly achieve a perfect fraud prevention strategy. Identity fraud is a very complex field, and it takes many years to master it. You don’t need to become an expert overnight, and even when you implement a strategy, you shouldn’t expect it to be perfect within the first few attempts. Many business owners struggle with fraud prevention, and it’s OK if you do, too.
Instead of carrying this burden alone, release it onto the shoulders of fraud prevention software and industry experts. This will make the pathway toward an optimized fraud prevention strategy much easier to traverse.
A Successful Fraud Prevention Strategy
Most fraud prevention strategies fail because business owners have adopted a set-it-and-forget-it mentality, but we can’t solve any problem just by flicking a switch. If there’s anything all entrepreneurs can agree on, it’s that no problematic area in business can ever be resolved with such ease.
Instead, align yourself with experts (or similar businesses) that have designed a successful fraud prevention strategy — one comprised of the perfect balance between fraud analysts and automated solutions. Such augmentation addresses all of the vital requirements of an effective fraud prevention strategy: continuous vulnerability monitoring, real-time decision-making, and scalability.
Experts will help you avoid the common pitfalls impeding business growth — such as unnecessary market limitations — and encourage you to approach fraud protection as a process, one involving an appeal to data-driven insights, advice from fraud experts, and frequent discussions with each of your vendors.
Such an approach doesn’t just strengthen business relationships. It also helps you address the specific vulnerabilities facilitating fraud so that a highly-targeted fraud prevention strategy can be achieved without the risk of implicit bias.
Yes, You Can Outsmart Fraudsters
Cyberattacks are on a steep upward trend, which means identity fraud will only become a bigger problem in the future.
The good news is there’s still time to prepare, but only if you act now. Don’t let fears of investment or failure be the reasons your business suffers irrevocable damage from fraudsters. Find a fraud prevention solution that gathers insights relevant to your unique business, then run this data by skillful analysts who can help you determine the best course of action for your business.
The answer to fraud mitigation is not an automation component or a fraud expert. It’s both. Remember, your adversary is not a robot – it’s a human. So, think like a human, but partner with experts that know how to process data like a robot.