Breach Disclosure Laws May Benefit FIs With Respect to Customer Loyalty

It seems that data breach disclosure requirements are actually beneficial if you’re a financial institution (FI). A Carnegie Mellon University study found that customer loyalty depends to some degree on whether or not a breach can be traced back to particular cause, such as a merchant breach or other fraud. And keeping customers may be more profitable than the initial hit to reputation or stock price.

The study looked at data from 500,000 accounts at a U.S. FI between 2008 and 2013, including debit and credit transactions. It also included calls placed into the financial institution’s customer care center. It found that if the incident could not be attached to a particular merchant or fraud charge, customers were 3% more likely to switch to another FI within six months of the incident. This was even if their money was refunded within 10 days. It points to customers having doubt that their money will remain safe if it’s left alone.

While the average loss was $125, the figure at which the customer decided to make a move was when the loss was $500 or more. This causes one to surmise that the customer will blame the FI, if they can’t get closure on how it happened.

In large part, customers who see their FI's efforts in helping them to understand cybercrime and how to avoid it, have a much stronger loyalty to their FI as they feel cared about at a different level than just their account. For FIs, the more informed their customer base is, the less fraud risk they pose, making cybersecurity education a win-win for FIs and customers.

There is plenty of evidence that data breaches do negatively affect stock price immediately after they occur. However, this study also brings to the fore the efficacy of having data breach notification laws in place. The cost of not having them may be even more pricey to a FI than without them. Currently 47 states do have them in force. It seems that if customers know how their information was stolen or which organization had a lapse in security, they are more likely to stick with their FI.