Balancing Fraud Prevention and Profitability: Best Practices for Community Financial Institutions 

In today’s world, community financial institutions find themselves at a crucial crossroads: how to combat escalating fraud risks without sacrificing growth, customer experience, and ultimately profitability. The task is not just to minimize fraud losses, but to do so without costing the bottom line. Striking this balance is essential because effective fraud management is no longer just a regulatory requirement; it is a business imperative linked to profitability, reputation, and even long-term viability.  

Why it Matters 

According to the Jack Henry 2025 benchmark study of 150 bank and credit union CEOs, profitability and growth top the list of strategic priorities, yet fraud loss now ranks among the highest concerns, on par with other urgent issues like margin compression and talent shortages. Similarly, the Bank Director 2025 Risk Survey of 270 bank executives (85% of whom represented banks under $5 billion in assets) identified cybersecurity and fraud as their top strategic challenges – more pressing even than interest rate or credit risk.  

The Modern Fraud Landscape 

Fraud today manifests itself in many forms. According to Brett Rawls, PRI’s Head of Client Engagement, some of the most prevalent types of fraud include: 

• Card fraud driven by card-not-present transactions, with card info derived from account takeover, skimming, and cloning.  

• Check fraud with tactics ranging from check washing (enabled by mail theft), counterfeiting, and altering dollar amounts. Increased usage of mobile deposit features has led to an additional uptick in check fraud activities. 

• Business Email Compromise that targets internal wire processes via fraudulent invoices mimicking trusted vendors. 

• Elder fraud and other exploitation of vulnerable populations with criminals targeting those least able to defend themselves. 

• Digital threats including phishing, social engineering, and P2P payment scams, compromising both customer and bank staff credentials. 

The Cost of Fraud 

Fraud inflicts more than simple financial damage – it creates a ripple effect throughout the entire institution. Customers expect their money and data to be safe, and a widely reported fraud incident can cause a loss of trust, reduced deposit growth, and increased client attrition. Further, overzealous fraud controls can create customer friction that leads to dissatisfaction and lost business. In a world saturated with banking options, unnecessary barriers may drive customers to choose a competitor’s offering. 

In addition to fraud itself, false positives where genuine card transactions are wrongly flagged as fraudulent are also costly. In this case, customers will often stop using the affected card altogether, hurting both non-interest income and future cross-sell opportunities.  

Strategies for Proactive Fraud Management 

As frustrating as it may sound, it’s a simple fact that fraud is inevitable in banking. According to PRI Director of Payments Candace DeBarger, “Bad actors aren’t going away – they can make all sorts of money doing this. What is the one way we can eliminate all fraud? By declining every transaction. And we don’t want to do that because declining every transaction means eliminating your number one source of non-interest income.”  

Instead, fighting fraud demands a proactive, multifaceted approach – one that balances robust defenses with careful attention to customer experience and profitability. This approach can include: 

1. Creating a fraud-resistant culture 

A resilient fraud prevention strategy begins with organizational culture. PRI consultant John Chappelle stresses, “Tone from the top does matter – fraud management is everyone’s job.” Team members should feel safe raising concerns without fear of blame, supported by visible senior leadership and clear procedures to follow when fraud is suspected or spotted. 

2. Educating staff and customers 

Education stands as one of the most effective and accessible fraud-fighting tools. Staff training is critical to keep pace with rapidly evolving threats, and robust customer education is just as important: it positions the financial institution as a trusted partner and differentiates its brand in the community. As Chappelle puts it, “Managing fraud is a joint effort between customers and bank staff.” 

3. Leveraging Vendors and Technology 

Effective fraud solutions increasingly leverage partnerships with external entities like processors, card networks, and technology vendors. AI and machine learning systems are also gaining traction: they rapidly ingest data to spot fraud in real time. 

4. Optimizing processes and alerts 

A key to sustainable success in fraud management is the frequent review and fine-tuning of fraud rules and alert systems. Every institution’s market and customer base is unique, requiring tailored controls, thresholds and triggers. These measures should be flexible enough to adapt to both low-risk and high-risk activities, with solutions scalable to the institution’s size and changing risk profile. 

5. Collaborating across the industry 

Peer networks and industry associations are valuable sources of intelligence, best practices, and mutual learning. Uniform fraud-fighting tactics and open dialogue among community institutions help contain widespread threats. “Fraud is like a virus,” notes Rawls – it quickly spreads across institutions – so coordinated defense efforts are vital.  

Measuring Performance: Critical Benchmarks 

To gauge the success of fraud management efforts, DeBarger recommends community institutions monitor several vital benchmarks: 

• Fraud loss rate: 5–8 basis points of total dollar-volume spend is considered appropriate.  

• Fraud detection rate: While anything above 85% is acceptable, top-performing institutions often exceed 90%.  

• Transaction approval rate: Above 90% is ideal, reflecting minimal disruption to legitimate business.  

• False positive rate: A ratio between 5:1 and 8:1 balances security and customer experience.  

Regular monitoring of these metrics ensures that fraud controls are stringent while still supporting growth, engagement, and customer loyalty. 

The Never-Ending Marathon of Fighting Fraud 

Fraud management is not a one-time initiative, explains Rawls, but rather a “marathon that never ends.” Bad actors continually evolve their tactics, so banks must evolve too – fostering a culture that never loses focus and never lets down its guard. For institutions striving to minimize fraud while maximizing profit, the message is clear: never abandon the quest for balance, invest in people and technology, measure results, communicate openly, and remain agile to meet the threats of today and tomorrow. 

Resources: 

2025 Strategy Benchmark Study – Jack Henry 

2025 Risk Survey – Bank Director 

Fraud Trends: 5 Common Tactics and How to Counter Them – PRI  

The Power of Customer Education for Fraud Prevention – PRI 

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