SOUTH BEND, Ind.–A new study has uncovered both a not-so-surprising as well as a surprising finding about consumers when it comes to financial fraud and the institutions they do business with.
The study found that when a financial institution is unable to tell a customer/member about who perpetrated fraud against them—even though in many cases it’s nearly impossible to identify fraudsters—most customers/members end up leaving due to a lack of “trust”—but also uncovered a stronger relationship when the FI can identify the source of the fraud.
The study, conducted by Vamsi Kanuri, the Viola D. Hank Associate Professor of Marketing at the University of Notre Dame’s Mendoza College of Business, and titled “Mitigating Churn After Online Financial Fraud: The Value of Blame Attribution,” is set to be published in the forthcoming issue of the Production and Operations Management journal.
More Than 400,000 Records Reviewed
According to Kanuri, the research examined data from a major U.S. bank covering 422,953 customers over five years and found that a “lack of clear answers from the bank resulted in a big increase in people who had experienced fraud leaving — 40% more than those who were never defrauded in the first place,” according to Notre Dame News.
On the flip side, Kanuri, along with Mendoza’s Sriram Somanchi and Rahul Telang from Carnegie Mellon University, showed that, “surprisingly, when the bank catches the real fraudster, not only do customers feel more secure, but also 62% fewer leave compared with customers who never experienced fraud at all, the report stated.
Counterintuitive Finding
“Intuitively, we might expect that any instance of fraud would harm the relationship between a customer and their bank, even if the case was resolved,” Kanuri told Notre Dame News. “After all, fraud is a serious violation of trust, and you would think it would automatically push customers closer to the exit. Yet we show the opposite in cases of correct attribution: Not only do customers stay, but they also display higher levels of loyalty than those untouched by fraud. This is a real-world demonstration of the service recovery paradox, where effective handling of a failure can make customers more loyal than if no problem had occurred.”
According to the study’s authors, a FI that fails to catch fraudsters creates an immediate, lasting impression of unreliability, though it fades over time.
On the other hand, a bank that successfully catches fraud and protects its customers earns a stronger, more permanent reputation for competence. Kanuri said this demonstrated that “how fraud is resolved shapes not only immediate reactions, but also the long-term relationship between banks and their customers,” the report explained.
One Caveat
But the findings also come with a caveat, as not all customers react the same way, according to the researchers.
The data revealed that factors such as tenure and how often customers interact with their bank influence their responses. Customers with shorter relationships and fewer touchpoints are more likely to leave a bank if a fraudster goes unidentified, since they don’t have a long history of trust to rely on. Longer-tenured customers or those who engage more frequently with the bank are more forgiving, the report stated.
