Credit Unions Caught Off Guard by Plastic Card Losses, But Have the Power to Take Control of Fraud Exposure
Change is said to be the only thing that's constant. And in the last year, credit unions that issued plastic cards witnessed plenty of changes. As we continue to operate in a world of constant change, it's important to occasionally take stock of past events in order to learn and better anticipate future changes.
A recent, notable change for credit unions has been the increased threat of plastic card fraud. We've already seen the impact of those changes: Fraud losses tracked by CUNA Mutual Group on plastic cards roughly tripled between 2003 ($40 million) and 2006 ($120 million estimated).
As an industry, we were caught off guard by the magnitude of these losses. This forced the costs for insurance and our definition of "expected" losses to change in order to make the insurance coverage viable for credit unions. What did we all learn?
We learned the technology available to criminals improved, making it worthwhile to target smaller issuers, including credit unions. According to Websense (http://www.websense.com), during October, 19 credit unions were targets of phishing scams. At least two of those credit unions issue fewer than 1,000 plastic cards. Criminals also figured out how to leverage technology to access merchant databases to steal card data and make counterfeit plastics. This tactic doesn't discriminate based on issuer size. If your members' data was accessible, it was as vulnerable as everyone else's.
We learned our industry is motivated and capable of managing plastic card fraud. Visa implemented new processes to help issuers recover losses that were due to merchant compromises and all of the card associations, continue efforts to address data security issues with its merchants. Processing partners stepped forward with a series of communications and public forums specifically to remind credit unions of the tools available to help protect them. Other processors reviewed their current capabilities and decided to invest in new tools and new technologies in order to offer credit unions better security. Credit union leagues, associations and corporates followed suit with additional efforts to educate their constituents and to act on their behalf when possible. Credit unions showed their commitment to understanding and addressing the problem. We estimate more than 10,000 credit union employees participated in card-focused Webinars that CUNA Mutual sponsored in 2006. As a result of credit unions leveraging CVV/CVC validation for PIN-debit transactions, losses have decreased by roughly 50% for that particular category. The most important lesson we're learning involves the need to change our perception of fraud losses and their impact on credit unions. If we limit our perspective to the fact that fraud losses tripled in the last three years, we risk missing the bigger picture. Even with the dramatic increase, fraud losses for credit unions are not extraordinary compared to the rest of the card-issuing industry. The standard industry measurement for plastic card fraud losses looks at the losses as a percentage of the dollars that transact using the card. Currently, about 0.07% of transaction dollars are lost to fraud. Not only is this level of loss sustainable, but it's less than half of the loss rates that plastic card issuers endured in the early 1990s.
As an industry, our losses tripled because more credit unions began to experience fraud losses. The change in technology used by criminals drove this trend. What does the future hold?
The relationship between fraud and fraud control will always be dynamic. Whether or not we continue to see increasing losses as an industry is difficult to anticipate, but it's not likely the crooks will give up or that technology will become less sophisticated. Criminals will continue to look for vulnerabilities, and plastic card issuers will continue to adapt. Credit unions demonstrated they were willing to face the challenges in 2006.
Of all of the challenges we face, the most important will be how we choose to view and manage plastic card fraud. It will be critical for each individual credit union to understand where plastic cards fit in their financial plans and their mission to service their members.
If we choose to look at today's plastic card fraud through the lens of the past, the view is disheartening; more credit unions have losses today than three years ago. But if each of those credit unions compares their losses to the value of their portfolios, many will find that losses can be managed to a level that preserves the value of the product. Changes will continue to affect credit unions. The last major change for those in the plastic card business was outside of our control. Technology delivered a problem to us that we hadn't seen before and for which we weren't prepared. Change happened, and we adapted.
The next round of changes can be controlled by credit unions. Credit unions can change their expectations by understanding that fraud losses do occur. Credit unions can change the way they think about fraud losses and their impact relative to the value of the card products. By changing the way we view plastic card fraud losses, credit unions can bring new perspective to the tools, services and tactics that will be important to protecting their membership.