Balancing customer experience and fraud prevention in the financial services industry

In today’s hyperconnected, diverse digital world, financial institutions face a daunting challenge: how to deliver seamless, friction-free experiences to their customers while safeguarding against an ever-evolving landscape of fraud. In a Mastercard 2023 survey ¹ on consumer expectations and trust, we surveyed over 9,000 consumers across North America, Europe and Asia Pacific about their preferences for digital account experiences. The vast majority (92%) reported wanting a fast, frictionless experience – while also expecting it to be as safe and secure as possible. In fact, 71% of consumers reported that, should they experience fraudulent activity when using a company’s app or website, they would not do business with that company again in the future.

So, how do financial services find the optimal middle ground between customer satisfaction and robust fraud prevention? Too much friction during onboarding or transactions can lead to drop-offs, frustrating legitimate customers. On the other hand, inadequate security measures open the door to financial losses and erode trust. Navigating this tension requires a comprehensive approach—one that goes beyond traditional verification methods to protect against fraud without sacrificing customer experience.

The impact of fraud on the financial services industry

According to Nasdaq’s 2024 Global Financial Crime Report, fraud scams and bank fraud schemes resulted in $485.6 billion in losses globally in 2023. ² In the U.K., 1.4 million cases of fraud occurred during the first half of 2023 – that’s the equivalent of one every 12 seconds. ³ Meanwhile, a global study conducted over 2022-2023, revealed that the Banking sector was found to be more severely impacted by identity fraud than any other sector, with a median financial burden of over $310,000. ⁴

Beyond the immediate financial losses, the reputational damage from a single breach can be devastating, leading to a significant erosion of trust and long-term customer attrition that is far harder to recover from than monetary losses alone.

The impact of friction on the customer experience

When it comes to discussing the impact of friction on the customer experience, the statistics speak for themselves: In 2023, 48% of consumers encountered friction while opening online accounts—and of those, nearly half took their business to another bank. Furthermore, 68% of consumers abandoned their online applications for financial services outright due to friction. ⁵

So, what’s the answer for banks caught between the threat of consumer churn, increasing fraud losses and the looming risk of reputational damage?

KYC isn’t enough: The need for adaptive solutions

KYC protocols have long been essential to onboarding and identity verification, but they often fall short in today’s fast-paced digital world. Static by nature, they can create friction and are insufficient against modern fraud schemes. Financial institutions must go beyond traditional KYC, adopting adaptive, risk-based authentication methods as supplemental tools, leveraging AI and implementing personalized security to balance protection and customer experience.

Mastercard’s Identity solutions: Enhancing fraud prevention

At Mastercard, we’re committed to building trust online by helping financial institutions more confidently assess digital identities. We achieve this by enabling businesses to:

• Contextualize data to understand how identity elements are used over time and across organizations.
• Understand and prevent evolving fraud across borders and industries.

And importantly:

• Balance fraud prevention with customer experience.

Our Identity solutions assess customers before account creation by leveraging probabilistic data pre-KYC. For instance, when a customer enters their name, email and phone number into a bank app, a probabilistic check ensures:

• The name matches the other identity elements.
• The phone number is valid and aligns with the other inputs.
• The email is valid, active and matches the other identity elements.

Unlike static, rules-based models, Mastercard uses global data, advanced data science and machine learning to assess how identity elements behave in digital interactions. This allows institutions to verify applicant details, such as email, phone and address and accurately assess risk.

For example, an application from an unusual IP address can be flagged for further review, while customers with identity elements assessed to be likely legitimate can enjoy smoother onboarding, boosting customer acquisition.

By leveraging real-time insights, financial institutions can maintain compliance, prevent fraud and prioritize customer experience throughout the entire lifecycle.

Want to dive deeper into customer experience and fraud mitigation? Watch our latest webinar, Elevate Customer Experience and Secure Trust in the Financial Services Ecosystem, featuring Mastercard, Provenir and Sun Finance:

Sources:

1. Identity Verification: Facilitating trust, driving growth and providing great customer experiences, Mastercard and Vanson Bourne, 2023
2. 2024 Global Financial Crime Report, Nasdaq, 2024
3. UK consumers lose £580m to fraudsters in first half of 2023, figures reveal, Guardian, 2023
4. Global Survey: Identity Fraud Cost Nearly Half a Million US Dollars to Every Third Bank Last Year, Regula and Sapio Research, 2023
5. 3 Ways to Avoid Application Abandonment in Digital Lending, BankDirector, 2023