SMBs At Risk For Financial Fraud

Small and midsize businesses remain a prime target for financial fraud based upon the findings of the 2011 Small Business Owner Fraud report from Javelin Strategy & Research. Between 2009 and 2010, there was a significant decrease in fraud rates, but despite that decline, they're still 17% higher for SMBs than for consumers.

"There are several reasons why that's the case," said Phil Blank, senior research analyst, security risk and fraud, at Javelin Research, in an interview. "For one thing, SMBs are at the core of revenue-generation activity. For another, they're generally not focused on protecting themselves or their clients." According to the report, SMBs usually don't have IT staff dedicated to fraud prevention and detection. What's more, small businesses are less likely than enterprises to have formal processes and procedures in place for their security practices and credit card operations.

What kind of fraud are we talking about? The report focused on three types:

-- Existing card (someone steals/uses your credit or debit card number)

-- Existing non-card (somebody hacks into your savings account online)

-- New account (someone opens a line of credit in your name)

Fortunately, many SMBs catch on to fraudulent activity pretty quickly. Among respondents, 50% said they discovered the fraud within a week. On the flip side of the coin, however, 25% of SMBs took one month or more, and 7% didn't realize any fraudulent activity had taken place for a year or more.

No matter how long it goes unnoticed, though, fraud takes its toll on businesses. And that toll goes beyond just stolen funds or compromised financial data. "There's a significant delta between the initial cost of fraud and the total loss once you've tallied up legal fees, account fees, and loss of business," Blank said. And this loss doesn't just affect SMBs; it also undercuts the financial institutions that serve them. According to Blank, 1 out of 3 customers never goes back to the store where fraud occurred, and 1 out of 6 SMBs will defect to another financial institution or drop their credit/debit card within a year after fraudulent activity occurs.

So, what can SMBs do to fight fraud? As noted in the Javelin report, "many of the tools and techniques used in the consumer market can be successfully used by financial institutions and issuers to help protect [small and midsize businesses]." These include real-time alerts; antivirus software; protection against man-in-the-browser, or MITB, attacks; and comprehensive ID fraud protection services. "The [SMB] must be empowered by the [financial institution]…," the report reads. "Rather than driving a change in behavior by imposing additional cost on the [SMB], the [financial institution] should use a system of no-cost incentives that will increase its revenue from the SMB while providing a more secure environment."

In the new, all-digital InformationWeek supplement: Our 2011 Strategic Security Survey confronts the five biggest problems faced by midsize companies. Download it now. (Free registration required.)