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Rise in Online Banking Fraud Costing Banks Customers, Study Says

Ponemon Institute/Guardian Analytics study finds 40 percent of small and medium businesses change banks after a fraud incident.

Everyone knows business online banking fraud has increased over the past few years, with new incidents reported every day. But a study released by the Ponemon Institute and Guardian Analytics yesterday quantifies just how large and pervasive this problem has become.

According to the research, which polled 500 executives and business owners from small and medium businesses in the United States, 55 percent of businesses were victims of fraud in the last 12 months, with 58 percent of fraud enabled by online banking activities. Eighty percent of banks failed to catch fraud before funds were transferred out of their institution. In 87 percent of fraud attacks, the bank was unable to fully recover assets and 57 percent of the respondents that experienced a fraud attack were not fully compensated by their banks. Twenty-six percent were not compensated for any part of their losses.

All this fraud has damaged banks' business customer relationships — 40 percent of businesses said they have moved their banking activities elsewhere after a fraud incident. Eleven percent of businesses that have experienced fraud claimed they have terminated their banking relationship following fraud attacks, and additional 29 percent said they did not fully terminate their relationship, but moved their primary cash management services to another institution.

Business customers surveyed complained of a lack of transparency; 24 percent of businesses claim that their banks do not provide a policy explaining the bank's responsibilities to secure and protect their companies' accounts from fraud. Thirty-nine percent are unsure if such a policy exists.

"Banks have a new troubled asset — their customers," said Terry Austin, CEO, Guardian Analytics, in a statement. "The survey data proves that financial institutions are failing to protect the small and medium businesses that are at the heart of our economic recovery. SMBs are fed up with the banks that are leaving them vulnerable to fraud and not reimbursing them when they are attacked. Banks that do not improve their fraud prevention practices will lose customers and hurt their own recovery."

"Ultimately the data points to the need for banks to evolve their definition of reasonable security and proactively invest in process and technology to better protect their online banking customers," said Dr. Larry Ponemon, chairman and founder, Ponemon Institute. "Only 20 percent of banks were able to identify fraud before money was transferred. The ROI of investing in fraud prevention is clear when you consider how fraud and churn drive productivity and profit loss as well as legal and reputation risks."

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