Fraud has long been a challenge in the financial sector, but today’s environment presents unprecedented risks. Record-high transaction volumes and a surge in first-party fraud are putting immense pressure on banks to do more with fewer resources, especially when it comes to resolving disputes.
As recently as 2023, 79% of community financial institution leaders reported direct fraud losses exceeding $500,000. This figure doesn’t even account for the operational costs of investigating and processing dispute claims.
While fraud is often viewed as a purely financial issue, the reality is that its impact goes far beyond the bottom line because how bankers respond to fraud and resolve disputes can significantly influence the quality of the customer relationship. In fact, a recent consumer banking survey revealed that poorly handled fraud incidents are among the top reasons customers switch financial institutions. With many disputes taking 45–90 days to resolve, it’s no surprise that customers grow frustrated with prolonged timelines to resolving legitimate disputes.
The positive news for bankers is that, when handled correctly, these incidents also present a unique opportunity to build trust with customers and actually strengthen customer loyalty. According to a J.D. Power survey, 92% of customers who felt supported during a fraud incident said they were likely to stay with their bank afterward.
This insight highlights how banks can transform a major challenge into a competitive advantage. Here are three proven strategies to reduce financial losses and deepen customer loyalty in the face of fraud:
Quickly distinguish fraud from legitimate disputes
First-party fraud, where customers dispute legitimate charges to avoid payment, is making it harder for FIs to distinguish legitimate fraud from false claims. The faster a bank can make this distinction, the quicker it can resolve issues, reduce losses, and deliver a high-quality experience to customers who truly need support.
How to implement:
- Analyze historical data to identify key questions that help differentiate legitimate disputes from fraudulent ones early in the process.
- Customize fraud resolution workflows based on transaction type and customer history.
- Use AI tools to analyze transaction data in real time, identifying patterns that signal fraud and prioritizing genuine claims.
- Automate repetitive processes to streamline fraud identification and resolution.
Keep customers informed while ensuring swift resolutions
Two factors tend to either make or break the customer experience during fraud resolution: clear communication and speed to resolution. Customers value transparency and while they typically understand the need for verification, the way the process is handled can either build or erode trust.
How to implement:
- Notify customers promptly when suspicious activity is detected, even if the investigation is ongoing.
- If additional verification is needed, explain why it’s necessary and how it protects their account.
- Provide a clear outline of the steps involved and a realistic timeline for resolution.
- Use AI-driven platforms or dedicated fraud teams to accelerate resolution times.
- Keep customers updated throughout the process to reduce anxiety and build confidence.
Continuously improve fraud prevention with data
Fraud prevention is not a one-time fix. Rather, it requires ongoing refinement. Data is your most powerful tool for identifying vulnerabilities and improving efficiency. By analyzing past fraud cases and customer feedback, banks can adapt their strategies to stay ahead of evolving threats while enhancing the customer experience.
How to implement:
- Regularly review fraud trends to identify new tactics and gaps in detection.
- Close feedback loops by identifying what information could have helped resolve past cases faster.
- Leverage AI platforms that learn from each case to improve fraud detection over time.
- Collect customer feedback on fraud resolution experiences and use it to refine processes.
- Pilot new fraud prevention strategies on a small scale, using performance metrics to evaluate effectiveness before broader rollout.
Innovative financial institutions like MidSouth Community Federal Credit Union are already employing these strategies to more quickly identify fraud and better manage dispute resolution for members. In doing so, the institution realized a 51% reduction in fraud loss and 90% drop in cost per dispute.
Fraud is an inevitability for banks but by implementing intelligent strategies to quickly identify fraud and resolve disputes, institutions can turn the process into a trust-building opportunity with their most valuable customers. These moments, when handled with care and efficiency, strengthen customer loyalty and lay the foundation for more meaningful, more profitable, long-term customer relationships.
Shanthi Shanmugam is Cofounder and CEO of Casap.
