Will Rising Fraud Fears, Costs, Lead More CUs to Abandon Credit Card Market?

MADISON, Wis. – Although none of its executives will say exactly how much, it seems almost inevitable that CUNA Mutual will increase the costs of credit and debit card coverage in the coming months as the insurer seeks to protect itself from the wave of spectacular card data breaches and frauds that have swept the U.S. industry over the last two years. Phillip Tschudy, spokesman for the insurer, emphasized that the firm had not begun to discuss possible rate increases with client credit unions, but pointed out that the two dollars of loss for every one dollar of premium the insurer has suffered in this area is clearly not sustainable. “As part of this effort to stem the tide [in card fraud losses], we are also reviewing our underwriting procedures and guidelines, which could affect coverage limits, annual aggregate deductibles, and per card deductibles and/or limits,” Tschudy explained. “We have not discussed rate changes with credit unions, although we are looking at all aspects to enable CUNA Mutual to continue offering plastic card coverage. We are continuing to actively communicate with our policyholders about this critical issue.” This apparently inevitable, eventual, increase in card insurance rates sparked the question of whether the costs of insuring against fraud, as well as the fear of fraud itself, might be enough to trigger CUs into selling their credit card portfolios to banks. “Well, I can’t speak to whether the costs of insurance would prompt any to sell,” explained Willie Koo, CEO of Asset Exchange, the leading brokerage of credit union card portfolios, “but I can say that one year ago fraud was not really on the radars of any CUs who asked us for portfolio evaluations and now it is among the reasons they are thinking about selling.” Koo said that the fraud fears were understandable, particularly in smaller credit unions, which might not have the resources to withstand a sustained theft. But he also pointed out that a CU could have some options, such as looking for a processor, which supported the most up-to-date anti-fraud systems and would fit the best practices campaign that CUNA Mutual had launched to try to limit losses. Jan Daily, spokesman for TNB Card Services, the card processing arm of credit union-owned Town North Bank said that the noted purchaser of smaller card portfolios said, “Some of the smaller CUs could just be swept away by these things if they get hit badly.” Sue Chrzan, spokesman for Card Services For Credit Unions, the association of credit unions that process their card transactions with Fidelity National Information Services, the former Certegy, noted that media coverage of the fraud losses had obscured the reality that the average number of fraud cases, as a percentage of total transactions, had dropped. “As the number of card transactions has increased the percentage of fraudulent transactions has decreased,” Chrzan said, noting as well that most of the significant new fraud threats had appeared in the debit area, not with credit cards. “The thing is that we have always said that credit unions need to work their credit card portfolios and stay on top of them,” Chrzan said, “by paying attention to the fraud alerts for example and having procedures in place to address fraud when it happens.” A source familiar with credit union card programs who did not want to speak for the record echoed Chrzan’s comment that the real emerging fraud concerns had more to do with debit cards than with credit cards and debit cards, the source noted, could not be outsourced in the same way that some credit card portfolios have been. He also predicted that, over time, the fraud protections available for debit would eventually come to mimic the fraud protections available on credit and that these have generally been very good. “Eventually even PIN-debit is going to be as secure as credit,” the source said, referring to the debit transactions in which cardholders use a personal identification number to validate their transactions rather than their signatures. “It’s just a matter of time and of limiting losses until that time arrives,” he said. [email protected]