Financial institutions face a relentless battle against fraudsters who drain money from customer accounts. Banks collectively spend millions each year trying to identify the culprits and prevent customers from walking away. Yet, in most cases, it is nearly impossible to pinpoint who carried out the fraud. This raises a critical question: should banks continue pouring resources into investigations that rarely end in accountability? According to Vamsi Kanuri, the Viola D. Hank Associate Professor of Marketing at the University of Notre Dame’s Mendoza College of Business, the answer is yes. His new study reveals that when a bank cannot determine the responsible party for a customer’s fraudulent activity, trust evaporates, accounts are closed, and customers leave.

Kanuri’s research, published in the forthcoming issue of Production and Operations Management, analysed data from a major U.S. bank covering 422,953 customers across five years. The findings show that when banks fail to provide answers, fraud victims are 40 per cent more likely to leave than customers who were never defrauded. However, the reverse is true when fraudsters are identified. Surprisingly, the study found that when the bank successfully caught the perpetrator, customers became not only more loyal but also 62 per cent less likely to defect than those who never experienced fraud in the first place.

This counterintuitive result reflects what Kanuri calls the “service recovery paradox”: effective resolution of an adverse event can actually enhance loyalty more than if the problem had never occurred. “Intuitively, we might expect fraud to damage the relationship between customers and their bank, even when resolved,” Kanuri explained. “Fraud is a violation of trust. Yet our data show the opposite when blame is correctly attributed. Customers not only stay, they display higher loyalty.” This demonstrates how transparency and accountability after fraud can transform an apparent failure into an opportunity to build stronger ties.

The study also sheds light on how increasingly sophisticated scams challenge banks. Phishing attacks now mimic bank communications with alarming precision, leading users to fake login portals designed to steal credentials. Fraudsters exploit advanced techniques such as SIM-jacking to bypass two-factor authentication and geo-spoofing to mask their actual location. In such an environment, a bank that misses culprits risks being seen as unreliable, an impression that lingers even if it fades over time. Conversely, a bank that successfully resolves fraud earns a lasting reputation for competence and security.

Not all customers react in the same way, however. The data revealed that newer customers with shorter relationships and fewer interactions are far more likely to leave when a fraudster is not caught, as they lack a foundation of trust. Long-standing clients, or those who engage frequently with their bank, tend to be more forgiving. Yet, strikingly, when fraudsters are identified, these differences all but disappear. The reassurance of accountability restores trust across the board, regardless of tenure or level of engagement.

The broader implications of these findings support policy reforms proposed by the U.S. Treasury Department, which seeks greater transparency in automated clearing house transactions and stricter reporting requirements for money-transfer apps. Such measures would improve banks’ ability to trace and attribute fraud, ultimately reducing customer churn. For Kanuri, the key insight is that the true payoff of fraud investigations is not found in recovering stolen funds but in preserving — and even strengthening — customer loyalty. By focusing on how fraud is resolved rather than whether money is recouped, banks can transform costly investigations into a long-term investment in trust.

More information: Sriram Somanchi et al, Mitigating Churn After Online Financial Fraud: The Value of Blame Attribution, Production and Operations Management. DOI: 10.1177/10591478251331125

Journal information: Production and Operations Management Provided by University of Notre Dame