MADISON, Wis. – Since early this year CUNA Mutual has been warning of a "crisis" in credit union card fraud. It has changed policies with its coverage to encourage credit unions to add more security functions and now it is set to push through rate increases.
CUNA Mutual Group began last week filing for rate increases with state insurance regulators to help cover a rising tide of losses. It hopes to have approvals by Oct. 1 and begin raising rates as policies come up for renewal.
"I do believe this is the biggest issue facing credit unions. We're fighting organized crime. If we can't keep insuring plastic cards, credit unions can't issue plastic cards. I've gone out talking to credit union leaders about this and they're telling me to file for the rate increases and do everything to keep the coverage available," said CUNA Mutual CEO Jeff Post.
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Post would not be pinned down to any percentage increase across the board because he says it will vary based on factors such as past loss experience, fraud prevention systems in place, size of portfolios, location, and others. He said some CUs could even get rate reductions.
CUNA Mutual started identifying the plastic card problem about a year ago. He said back then it targeted 231 CUs with serious loss problems. CUNA Mutual worked with the CUs to add new fraud features and change deductibles. "We thought we had the problem solved, the problem wasn't solved," said Post, who says criminal activity has picked up and criminals see credit unions as a soft spot in the financial industry.
Post said no one entity is to blame for the increase in fraud. He believes CUs need to do a better job of protecting their portfolios, CUNA Mutual needs to keep getting the word out, card processors have to utilize the fraud tools in place, and Visa and MasterCard have to enforce their merchant rules.
Even with all of that, Post thinks fraud can only be decreased by 50%.
Is CUNA Mutual moving towards dropping plastic card coverage entirely? When asked to predict if CUNA Mutual would be offering the coverage next year or the year after that, Post said he believed it would be.
"I am cautiously optimistic that we can slow this trend to a manageable level."
He regrets that Visa and MasterCard haven't pushed for the same technological advances in the U.S. as it has in the other countries they operate. He has called for Visa and MasterCard to implement new smart card technologies to make plastic cards safer. "We don't have enough technology in the cards to effectively fight fraud. We're fighting a 21st century war with 20th century technology," said Post.
Visa and MasterCard have recently said fraud numbers overall are low and they certainly aren't sounding the alarms as loud as Post. Post says the problem is credit unions are getting hit harder than other financial institutions and the thieves are getting better at beating the systems. "We need to bring the standard of credit unions' card protection up to the standards that the banks have. Credit union credit cards on the black market are worth more than banks because security is not so good," said Post.
What about some claims that CUNA Mutual is making the problem sound worse than it is? Post said losses this year are projected at $120 million, which will cost the company $60 to $70 million. "That's a big torpedo in the side of the boat," he said. "We don't have the kind of reserves," to continue that trend said Post.
The insurer said it is paying out $2 in claims for every $1 taken in. Last year, the company's plastic card coverage was hit for $89 million in fraud.
He noted that CUNA Mutual of course has to protect itself and continued losses could hurt ratings. "If we don't get losses under control we run the risk of being downgraded by AM Best. If we lose our financial ratings, we have a lot less value. Quite frankly we couldn't sell some of the products we do now," he said.
Post is also worried about the public perception hit credit unions will take if they continue to get hammered by losses and some CUs are forced to drop their plastic card programs. It's one thing to sell the credit card portfolio, but to not be able to offer debit cards could be a huge blow.
Rate increases will be across all types of cards-ATM, debit and credit.
A more adequate rating structure, coupled with underwriting actions and implementation of CUNA Mutual's Plastic Card Security Best Practices is essential for the company to continue offering the coverage, said Marc Krasnick, CUNA Mutual senior vice president, Credit Union Protection.
Recently, Krasnick appeared on a card fraud panel at CO-OP Network's annual conference in Las Vegas and told CU executives fraud losses have become "staggering" in 2006.
Krasnick appealed to CUs to tighten merchant enforcement and daily limit rules as well as undertake a more thorough review of operations to prevent fraud levels from going even higher than the projected $120 million for 2006.
CUNA Mutual has offered card insurance coverage since 1981 through its property and casualty affiliate, CUMIS Insurance Society, Inc., as an endorsement to its CU fidelity bond.
"Plastic card coverage was intended to cover catastrophic losses, not routine, expected losses," said Krasnick.
CUNA Mutual said it will continue its multi-pronged approach to fighting fraud, including risk management education, risk assessment, merchant litigation, card association lobbying, legislative reform advocacy, and card processor partnering.
Krasnick warned that card fraud "may be the largest problem the credit union movement faces today" noting that CUs have long been more vulnerable than other financial institutions because of various factors including the trust relationship CUs have with members.
Krasnick also maintained that banks are simply "more sophisticated than the average credit union in combating fraud."
In listing best practices, Krasnick said CUs need to be more consistent on imposition of daily limits and on filing for fraud recovery due to rule violations.
He also called for CUs to use the special CVV/CVC encoding system on all PIN and signature mag stripe authorizations, and urged greater use of neural networks
As part of its enforcement procedures, Krasnick listed a series of steps it was taking on CU contracts including:
* CVV/CVC and CVV2/CVC2 validation compli-
ance.
* Compliance/recovery-loss mitigation on
renewals after Oct 1, 2005.
* Timely reporting of claims.
* Expiration date and card activation compli-
ance.
* Address verification compliance.
Further reviewing steps CUNA Mutual has taken, Krasnick cited 24/7 response capability, including the ability to identify high risk accounts and block them when necessary.
He said the insurer has increased annual aggregate deductibles, required per card number limits for all policyholders and increased use of co-payments.
Also appearing on the CO-OP fraud panel with Krasnick were James A. Hanisch, executive vice president-corporate development at CO-OP, and Stan Belitz, vice president of security and risk management at MasterCard International, both of whom agreed on the seriousness of CU card fraud.
Hanisch told Credit Union Times that CO-OP members are prepared to cooperate "and work closely" with CUNA Mutual in following the insurer's best practices guidelines.
"We do understand that it is a matter of economics," said Hanisch in explaining CUNA Mutual's rationale for the rate boost.
Editor's Note: Senior Correspondent Jim Rubenstein also contributed to this story.
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