Every fraud conversation eventually turns into a pricing conversation, and most banks and credit unions walk in ready to defend a budget using only one number: last year's fraud losses. HD Jacobs, a digital banking fraud solutions sales lead at Q2, joins The Purposeful Banker to make the case that losses are only one line in the real cost of fraud, and he walks through the operational, opportunity, and relationship costs that belong in the conversation, too.
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Hi everyone, Jim Young here. We know fraud is front and central at every bank and credit union these days, so we put together several episodes on the topic, beginning with today's conversation about rethinking the cost of fraud. In the coming months, we'll be talking about everything from the signals that indicate an account takeover attempt is in progress to advice on how to build your fraud prevention tech stack. So be on the lookout for more fraud related episodes.
Jim Young
Welcome to The Purposeful Banker, the podcast brought to you by Q2, where we discuss the big topics on the minds of today's best bankers. I'm Jim Young, your host. Welcome to the show.
Fraud in banking is a problem and a priority. On that, I think we all can agree, how big of a problem is it? And is it just a problem or also an opportunity? That's where the conversation gets a bit trickier. Here to help us sort it out on today's episode is HD Jacobs. HD is a senior sales specialist for fraud solutions here at Q2. And that basically means that every day he's having conversations in which banks and credit unions are trying to work out exactly some variation of this calculation, what fraud protection is worth to them and how did they defend that number to a CFO or to their board.
So in the spirit of this podcast, we're going to steer this conversation away from here's why you should spend money on Q2's Fraud Intelligence solutions and tackle this more from the lens of here's how you should be thinking about fraud costs in any conversation. So having said all that, HD, welcome to the show.
HD Jacobs
Awesome. Thanks, Jim. Appreciate the invite and excited to be here alongside you today.
Jim Young
All right, well let's start this off, HD, with just give us a little bit of background about you and your role at Q2.
HD Jacobs
Yeah, no, absolutely, Jim. So I am a senior sales specialist at Q2, so I support all of our native fraud solutions as well as our reseller fraud solutions, and I also help our clients understand within our Innovation Studio all of the different fraud vertical solutions that are out there. And I sort of help guide them as to what's going to be the best fit based upon the types of fraud they're seeing that will help get them the biggest bang for their buck but, most importantly, stop and mitigate the fraud that they're being hit with, their customers and members.
Jim Young
All right, so going into this fraud cost versus fraud solution investment debate, what actually brings a bank or a credit union into this conversation initially?
HD Jacobs
Yeah, no, absolutely. I mean, if you ask any banker around their priorities and their strategy, I mean, fraud is absolutely a part of that. Now, when they want to start addressing it, unfortunately, and while we don't wish this on any bank or credit union, it's that big fraud event. So whether it's account takeover, whether it's a spoofed URL, ultimately that's where they start to realize there's a problem. And unfortunately it's when it leads to losses that they really start to realize, "Hey, we've got a problem here. We need to address it. We need to nip it in the bud before it becomes an even bigger loss to the financial institution." So while we don't wish that on anyone, unfortunately that's the catalyst to, "Hey, we've got a problem, we need to solve it."
Jim Young
Gotcha. But going back to my intro, then it's a matter of figuring out, well, how big is this problem? And when you're starting to have that conversation, how are institutions typically defining fraud cost in your experience?
HD Jacobs
Yeah, I mean, ultimately the first thing I always hear is, "This is what we lost. We can't afford to lose that again." And they just really hone and focus on the losses they've been hit with. But as you know and why we're here today, there's a lot more to unpack there. When we think about really what's going into that equation behind the scenes, whether it's manual workflows or whether it's recovery, there's more to that equation.
Jim Young
Yeah. So what are some of the, I guess, holes in that conversation? You touched on a couple of them, but if somebody comes to you and says, "Well, hey, here's our problem. We lost $3.5 million last year in fraud, so that's what we need to address." How do you respond to them?
HD Jacobs
Yeah, no, absolutely. I say, "Well, you know what? That's one part of the equation.” But part of this too is you're not always going to see losses. If you have the right tools in place, then you're going to be able to mitigate this moving forward, but there's more to it. Because if you are protecting your customers and members today, it's probably a lot of manual workflows that are in place. So it's human capital that is still a cost that is having to manually review these alerts, unpack what's unfolded here.
There are safeguards that you're putting in place. And sometimes, unfortunately, that means we’ve got to turn off certain features, functionality within digital banking, so they're losing out on opportunity there. The other piece of it is when we think about automation. So because there's so much manual workflow and workload here, how can we automate this to stay ahead of fraud in a much more proactive sense?
Because really where the lens ends is, you know it, it's more reactive all the time. They're reacting to fraudulent patterns that they're starting to see. What can we beef up internally to try to stop that moving forward? Instead of taking more of a proactive stance, it's more reactive, more recovery, and all of that costs money to these financial institutions.
So that's where you have to start unpacking that equation more, where it's manual workflows, it's the automation that we need to start to tie into. And then third that a lot of our clients forget about, I mean, there are relationships on the line here. So if you lose one large commercial deposit customer, that's very impactful to the financial institution. And a lot of these FIs will say, “You know what, in order to preserve that relationship, we're going to take that loss and not hit our client or that customer back with that loss.” So that's something else that needs to be factored into the equation as well.
Jim Young
Yeah, no, that's a really interesting point. Back in the day when I worked in the PrecisionLender side of the house, we would talk about that in terms of a deal, like just, hey, how much is it worth it for you to take an exception or price in order to win an overall relationship?
And I guess what I'm thinking about here is we've seen some of the stats about, hey, if you don't handle a fraud situation well, you could lose a certain amount of money for that fraud, but a way bigger amount of money in total relationship walking out the door. That makes a lot of sense to me. I actually am kind of curious about that part, about the invisible part of it. When it's working well, you sort of don't ... I know we had a situation where we were talking to a client and they basically said, “We almost turned off a solution because nobody could understand why we were paying for it, but it was because it was working.”
So you didn't see the stuff that was coming through. And I guess when you go through and you walk them through this, and we should give a partial shout out here to LexisNexis because they've done some good work on the true cost of fraud and there's certain elements of this that go into that. But when you're walking them through this, what's sort of reaction are you getting from them? Are they fighting it? Are light bulbs going off? What's happening exactly?
HD Jacobs
I think it depends on the financial institution and what they've been hit with. So if they've been hit with losses, it's more of a recovery reactive, we need to figure out how to get a solution in place. Now for others, if they haven't seen a lot of loss, you really have to equate a fraud solution similarly to an insurance policy. It's like today I pay a monthly fee to protect my automobile, but it's not until I hit the deer that the cost really starts to reflect the value. So the same goes with fraud. It's not until you're hit with that big fraud event that you're like, oh, I have that protection layer in place to help get ahead of a lot of this.
But I think the other piece is that hidden opportunity cost. When we start to think about institutions aren't necessarily tracking, like you mentioned, turning off a feature within digital banking, the impacts of that and the missed revenue, whether it's Zelle, whether it's bill pay, it could be as simple as turning off the ability for a user to go in and update their email address or their physical address and phone number, and instead having to route that to the call center. And now it's burdensome on the call center anytime that change needs to be made. But then also you're making that call center prone to potentially fraudsters coming in acting like that individual to make those changes. So there's a lot more to that equation.
So you really have to, it depends on the position the FI is in, whether they've already been hit with fraud or whether it's more protection layer, the uncertainty of what's to come in the environment that you really have to unpack and build the value proposition a little differently. And that's where you start getting into the manual workflow reduction, automation, churn, what happens if you lose one of these relationships. But we also know that the fraud equation goes beyond just digital. There's fraud at the core, there's fraud in the call center. So all of that needs to be factored into the equation as well.
Jim Young
Yeah. And also what you just described, too, in terms of features you have to cut off or ways you have to route somebody with just kind of a, for lack of a better word, a crappy customer experience too, which is another factor in there. But we're talking about bankers here, and we love them here. That's why we have this podcast. But you can paint this picture. Numbers are what really matter at the end of the day. Can you put a number on this or how do you try to put a number on these things? If you're trying to give them a sense of, guys, you might not be thinking about this broadly enough, either in cost or opportunity, how do you do that?
HD Jacobs
Yeah, I mean, one of the tools you mentioned there is that LexisNexis True Cost of Fraud study. So for a lot of these financial institutions that just need a quick guide or gauge on what does this true problem look like from a dollars and cents standpoint, that survey and that study tells us that for every dollar of fraud loss, it's really $5.75 when you think about the manual workload, when you think about the backend work, the recoveries, the litigation that goes into each of these fraud events.
Now, if you really want to unpack that further, that's where we really start drilling down into, OK, manual, let's say review reduction. Let's look at the call per hour of let's say a fraud analyst. Let's drill down and look at, OK, if we can allocate their work to higher revenue areas within the financial institution instead of having to sit here and swivel chair to try to figure out and piece together the story around a fraud event, that really starts to lead to savings and it starts to lead to really big impacts at these financial institutions.
And automation plays a role there as well. When you start to drill down into how much time is being spent on each of these alerts, if we can provide, let's say, a very transparent timeline and story of everything that unfolded in a matter of clicks, then that's really where you start to really hone and focus on more of reaching out to the customer or the member rather than trying to piece together a story first. And at that point, money's probably already out the door, then you're more in a recovery mode. So we really want to focus more on that proactive stance and what can be impactful as part of that equation to really bring the expense down.
Jim Young
So the LexisNexis number, do you get pushback on that ever? I mean, do they go, "Eh, that's too high.”?
HD Jacobs
Oh yeah.
Jim Young
Interesting, really?
HD Jacobs
It's funny. I've actually talked to a couple of our clients and a couple of financial institutions and they push back absolutely. But interesting is when you start to unpack the pushback, they're like, "It doesn't cost us that much because we have all of these bodies in place and all of these workflows and manual processes in place that are making that number not be as significant." Then I'm like, "OK, well, you bring up something interesting there. You're talking about manual workflows, you're talking about human capital, that still comes in at expense." So eventually, even if you're not focused on just that $5.75 per dollar fraud number, there's still more to unpack there when you start to drill down into the time, the energy, the human capital that's actually being allocated here in order to keep that $5.75 number impact down to your financial institution. And that's where we get into some of these deeper conversations.
And really that's where I start to geek out because it really starts to open eyes as to how much time is truly being spent on the manual workflows to have the necessary fraud safeguards in place. And it helps validate what we're doing here and what we're thinking about truly as the right way to come to a number.
Jim Young
I'm going to give you a chance to pat yourself on the back, maybe recount a conversation where you got the light bulb to go off in just a moment. But I was thinking about it in terms of, we talk about the manual and how much time it takes people to do this, but I know in a couple of conversations we've had with people where they're particularly in the treasury and they'll say it's not their day job to be doing … their day job is to be selling treasury products. But we have an entire employee's worth of time spent tracking down these problems or these particular fraud incidences. So it's like, again, it's the cost of that, but it's also take away whatever you think he or she would normally sell in a year, and that's essentially added to that equation.
HD Jacobs
What's interesting too there, Jim, is that you have those individuals that's not necessarily their job or role, but they're trying to predict what's the next big fraud event that could potentially come. And I think what's unique when we start to think about some of these different fraud solutions is that a lot of these are becoming a network and a learning consortium where we want these solutions to do that work for them where they're not necessarily having to try to get ahead of the next big event. Let that fraud solution do it for you because they're starting to pick up on those solutions, the different ATO, money mule, suspicious account change schemes that are starting to unfold, particularly for us within digital banking.
And where it may not have hit that financial institution quite yet, it could be coming. But we surface that through real-time risk signals, for example, through different solutions to be able to get ahead of it so they can then see, OK, this is a pattern we need to be aware of.
So you don't have to have that individual, for example, in treasury trying to figure out what's the next scheme that's going to hit our treasury customer. It's more so allow a solution to do that work for you so they can stay ahead of what the fraud landscape looks like and what that evolution looks like.
Jim Young
OK. So again, I teased it a little bit, but did you have a particular time where you sort of—and maybe it's not quite like it is in the movies—sort of moment or maybe it takes place over several conversations, but where you did bring someone around to your way of thinking and was it something where you had to show them their own data? Give me maybe that moment and what it was that converted.
HD Jacobs
We've had a couple of those aha moments, believe it or not. One most recently where we had the fraud analyst, we had the head of fraud, but we also had the head of digital and a senior exec on the call. And when you were starting to go through a pricing conversation around the solution, the big thing the senior exec said was, "Well, our losses don't even amount to that." But what was interesting is it then became a conversation between the fraud team and that senior exec where the fraud analyst was starting to see, "You know what, this is going to save me hours of time. This is going to save me so much work or so much time in the work that I'm having to do to try to piece together a timeline and a story here." So actually this does make sense from a cost standpoint and ROI standpoint, but it was interesting to see that unpack and unfold actively on the call because that senior exec was essentially out of touch with the reality of what the true cost of the problem was.
And to your point and why we're here today, that individual was just focused on the losses. It was just that loss figure and then making sure that they account for that as part of their upcoming budget. But what's not being accounted for is all the manual workflows and the human capital that are in place in order to try to minimize that particular loss.
So it was interesting to see that unfold, and then that's where we started to see the light bulb go off where, OK, we may need to get a little bit more creative around the pricing structure here of a fraud solution, but it started to make sense and they were willing to then expand the conversation and take it further.
Jim Young
I guess finally on this, not every conversation can go quite that well, but overall during the course of, say, the last year or so you've been having these types of fraud conversations, have you noticed, has there been a shift? Are people you noticed maybe seeing a little bit more of the bigger picture when it comes to cost and the investment equation?
HD Jacobs
Yeah, I think it depends on the sophistication of the FI. It depends on the different fraud schemes they've been hit with. Some are still taking baby steps, especially when you start to introduce AI as part of this, how AI is going to play a role to their advantage, but also against them. They're starting to realize this is a problem, there's more to unpack here as part of justifying the expense. They know fraud prevention, fraud mitigation is expensive, but part of it's just building the business case and the justification for some of these solutions because, as I mentioned before, digital fraud mitigation is one piece, but they also have to think about the core. They have to think about the call center and what does that total equation look like of how much are we going to need to budget here in order to account for the total fraud protection layer?
And that's where we then get into some of the different nuances of areas they may not have thought of such as manual review reduction, operational efficiency gains, churn that really help justify and support the business case internally here to get the funding to support the tools necessary to address it.
Jim Young
All right. Well, great conversation, HD. You convinced me to go out and spend a lot on fraud solutions now, but that's what you're here for at Q2. But thanks so much really for sharing your take and your insights on fraud costs and fraud solution investments with us on The Purposeful Banker.
HD Jacobs
Awesome. No, I appreciate you allowing me to be here, Jim. Great conversation, and we're happy to have these conversations with any banks or credit unions that would love to double click on this, so appreciate you allowing me to be here.
Jim Young
You can also dive deeper on our website at q2.com where we have our viewpoint on the industry category of fraud intelligence and our perspectives on everything from how to stop account takeover to how to improve positive pay adoption. We'll include links to those pieces of content in our show notes.
And that'll do it for another episode of The Purposeful Banker. You can subscribe to the show wherever you listen to podcasts, including YouTube, Apple, and Spotify, and you can see our archive of podcasts at q2.com/thepurposefulbanker. It's going to be all one word, thepurposefulbanker. Until next time, this is Jim Young. Thanks for listening.