Banks are spending billions on fraud detection and mitigation, and tracking down fraudsters can be difficult — but if lenders can do it, customer retention is their reward.

That’s one of the major takeaways from recent research co-authored by Vamsi Kanuri, marketing professor at the University of Notre Dame’s Mendoza College of Business.

Banks might think the outcome of a fraud investigation doesn’t matter if a customer’s funds have been returned. Yet, “whether that investigation results in finding the perpetrator or not actually does matter quite a bit in terms of customers continuing with banks,” Kanuri said in a recent interview.

Researchers reviewed data from a major U.S. bank covering 422,953 customers over five years, finding that customers who experienced fraud that wasn’t resolved with an attribution of blame were about 41% more likely to leave the bank than customers who never experienced fraud. 

If customers who experienced fraud were told the bank had found the fraudster, however, those clients were far more likely to stay with the bank than customers who never dealt with fraud, according to the study, co-authored by Notre Dame professor Sriram Somanchi and Rahul Telang from Carnegie Mellon University.  

The study, published in the October issue of Production and Operations Management, demonstrates “the effectiveness of blame attribution on customer behaviors in a financial fraud context,” researchers wrote. 

“When firms are unable to hold an external entity accountable for customer-identified account-based fraudulent transactions, customers retaliate by severing their relationship with the firm, even when the firm credits the entire amount that the customers have lost due to fraud,” the study said.

The study findings embody the “service recovery paradox,” Kanuri said. That’s when customers who’ve experienced a problem that’s dealt with swiftly and sufficiently are more loyal and satisfied than customers who never encountered a problem.

“Our initial hypothesis was that these people should be mad, regardless, and we should see attrition, regardless of what the outcome is,” Kanuri said of customers who experienced fraud. “But it turns out, for these subset of customers, their trust is reinforced by the fact that if something were to happen to their money, the bank has the technological know-how to actually track the perpetrator, and that restores trust for customers, which eventually leads to these people staying longer than those customers that never experienced fraud.”

The findings underscore the importance of banks’ spending on fraud detection and mitigation, Kanuri said.

Kanuri recalled conversations study authors had with bank leaders, noting “one of the bank execs said, ‘We are spending all this money, what is the [return on investment]? When stakeholders and investors ask these questions, when board members ask these questions, we don’t have answers, but in our gut, we do know that it helps immensely with gaining back trust from the customers.’”

Because the bank that researchers worked with didn’t want to give current customer data due to the sensitive nature of information, the data Kanuri and his colleagues worked with was several years old, but “the context is still relevant,” Kanuri said. 

“This is a recurring problem,” he said. “It doesn't matter which year you look at; there's going to be problems.” 

About half of U.S. adults have had fraudulent charges made with their credit or debit card, Pew Research Center said in July. The FBI says more money is being lost to online scams and cybercriminals than ever, with a record $16.6 billion in losses reported to the agency last year. The Federal Trade Commission put fraud losses at $12.5 billion in 2024. 

As fraud and scams have become more pervasive, the issue has drawn increased attention and calls for collaborative action from lawmakers, financial services regulators and the industry. This year, banks intended to spend more on tech, with fraud mitigation being one of their top priorities, according to American Banker.  

Kanuri and his co-authors also discovered that customers who have more touchpoints with the bank and engage with it more frequently “tend to discount these one-off fraud cases, even when the bank is not able to identify the perpetrator” — which is notable given the low success rate associated with identifying fraudsters, he said. 

Educating customers on technological advances and what banks are doing to safeguard customer accounts seems to offer banks “a cushioning effect,” he said.  

Banks should also explore ways to soften the blow by testing different communication strategies with customers, Kanuri said. Rather than sugarcoat the information, lenders who’ve been unsuccessful in attributing fraud blame should put it plainly that they’ve not been able to find the perpetrator of the fraud. 

“It’s actually the beginning of the service recovery process, because once you do that, there’s going to be an after-effect of how customers perceive of your services,” he said. “So you should be following up with customers and doing everything possible to actually regain their trust.”