IMPACT OF FINANCIAL SCAMMERS

Today the impact of online fraud in the financial sector is undeniable. The first
thing that comes to mind when we read a headline about this is the direct
financial loss, with good reason. Every year online fraud and digital identity
theft result in losses in the millions for the financial sector, not to mention e-
commerce or telecommunications.

And this doesn’t just happen in the U.S., where online payments are more
embedded in daily life. Let’s take the example of a European market;
according to data from July 2016 in Great Britain, one out of ten people fell
victim to online theft or crime. In other words, you are twenty times more likely
to be robbed while you are in front of your computer than walking down the
street. 

Also, the increase in the use of mobile phones for financial transactions and
online purchases has not gone unnoticed. At the last Clab 2016, held in Peru
in September, the most recent data regarding mobile fraud was reported: it
has increased 170% from the previous year and now represents 62% of all
online fraud. 

Of this, identity theft represents 95% of attacks, and it is one of the most
common cybercrimes along with phishing and hacking. 

But, what does this mean for the financial sector? How does online fraud
impact digital banking and FinTech?

Loss of reputation
Security problems directly affect the company’s reputation, and this factor is
especially critical for FinTech, which must compete with the long-established
reputations of traditional banks. Loss of reputation directly affects obtaining
new clients as well as relationships with partners and investors.

Loss of client trust

As in the previous case, security is critical for clients of a financial institution.
Online fraud is perceived as a breach in the security of personal and financial
information, which causes a loss of clients, who are looking for institutions that
can offer them more guarantees. Even in the event that the client has not
been completely lost, cross sales with these accounts may be affected,
reducing activity with the institution to the minimum required.

But the problem does not stop here: even when the fraud arises from an
online payment to a third party, studies indicate that a high percentage of the
clients consider the financial institution to be responsible.

Security audits
Security audits are required for all companies that store data classified under
LOPD [Organic Law on Personal Data] with a medium or high level of
security. For financial institutions, data is considered to require a high level of
security, so an audit must be carried out every two years.

And although failure to carry out an audit does not involve a penalty in and of
itself, unauthorized loss, alteration, access, or handling of personal data does.

Loss of income
All of the foregoing, directly or indirectly, lead to loss of income, somehow
affecting the institution’s profit or loss. For large financial institutions, this loss
may be more or less absorbed, but in the case of FinTech, the loss may
determine the future of the company.

In summary, online fraud has an impact on the financial sector far beyond
immediate loss of income, since the effects of lower income due to loss of
reputation and trust manifest themselves in the short, medium, and long term
starting from when the fraud incident occurs.
Fraud can have a substantial impact on a business, no matter what size it is. The two most basic
types of fraud are misappropriation of assets by employees and fraudulent financial reporting by
management, whereby misleading or inaccurate financial information is disseminated to investors,
stakeholders and the public. The first type of fraud often happens without management knowledge,
and the second type is often unknown to employees. Both can devastate a company.

Financial Loss

Financial loss is an obvious effect of both types of fraud. When someone misappropriates company assets, the

loss is fairly easy to quantify. For example, if a cashier takes $60 from the cash register, the company loses

$60. The costs of fraudulent financial reporting are harder to determine. If a small-business owner perpetrates

financial statement fraud, an explicit dollar figure might not be obvious. However, fines assessed for

misleading investors, civil suits to recoup investor and creditor losses and the unwillingness of companies to
extend credit to the business in the future all add up to a severe financial loss for the company.

External Confidence

Once a fraud has been uncovered, the company faces an ongoing problem of public trust in the organization.

While a small business scandalized by fraud might never be the victim or perpetrator of another fraud, its

public image might be irreparably tainted. As a consequence, the company may have to pay a higher price for

credit, may be refused membership in trade associations or might not be considered for a strategic alliance.

Company Morale

The effect of fraud on a company's culture and morale can be shattering. Any association with a company that

has perpetrated or suffered fraud can be troubling and embarrassing for the people who work there. This may

be especially true in a small-business setting where workers feel more connected with one another. Even if

employees leave the company, they may carry an association with a fraudulent company into their next place

of employment, even if they were not involved with the fraud at all.

Increased Audit Costs

Small businesses that are subject to audit and have experienced fraud, especially if the fraud was perpetrated

by company management, are likely to be assessed as a high audit risk. That means auditors will more closely

scrutinize company books before signing off on a company's financial statements. When an auditor is required

to perform more procedures, the cost of the audit will increase. This can often be mitigated by demonstrating

that the offending managers or employees have left the company and the company has instituted strict

procedures to thwart future attempts at fraud.

Button, M., Lewis, C., & Tapley, J. (2012). Not a victimless crime: The impact of fraud on individual
victims and their families. Security Journal, 27(1), 36–54.

https://www.justice.gov/usao-wdwa/victim-witness/victim-info/victims-rights