Payments fraud is a well-known problem among credit unions and other financial institutions, but a new study from the Federal Reserve Bank of Minneapolis suggests that one of the most effective ways to mitigate fraud involves simply letting consumers view their information online.
According to the Federal Reserve, which surveyed nearly 300 financial institutions across the country last July and August, payment fraud losses are a problem for three-quarters of financial institutions, with 96% of debit card issuers and 77% of credit card issuers reporting it in 2016.
Card transactions weren't the only fraud source, though. About a quarter (24%) of FIs that offer ACH experienced fraud losses in 2016, and 13% were hit with wire fraud. Most (77%) FIs that offer checking also encountered check fraud. Fraud is increasing, too. Between 2015 and 2016, signature-based debit card fraud rose 63%, PIN-based debit card fraud rose 50%, credit card fraud rose 41% and check fraud rose 28%. Wire fraud rose 10%. ACH debit and credit fraud rose 8% and 2%, respectively.
"This report provides great insights into what FIs are doing and find effective to mitigate payments fraud. FIs could use the information to benchmark their own fraud mitigation methods against those identified as effective in the survey," Minneapolis Fed VP of the Payments, Standards and Outreach Group Guy Berg said.
Credit card fraud
Credit unions and other financial institutions are using a wide variety of methods and processes to fight fraud. But according to the data, giving customers online information services was the second most effective risk-management method for stopping credit card fraud (blocking and reissuing breached cards ranked first); giving customers alerts via text, email or within applications ranked fourth, after outsourcing card fraud management.
"It's noteworthy that 92% of FIs offer customers online information servicesand 75% of FIs provide customer alerts; both are rated relatively high in terms of effectiveness, indicating that FI customers are playing a role in fraud mitigation," the study said.
FIs also felt that chip card authentication, security code verification (CVV), and PIN authentication were the most effective fraud mitigation techniques during the authentication process. Respondents also said 3D Secure and blocking and/or scoring transactions from countries perceived as high risk were less effective.
Over two-thirds of financial institutions said that during the application process, pulling a credit report, using identity verification services and doing a credit underwriting review were most effective at mitigating fraud.
Debit card fraud
Credit unions and financial institutions appear to depend on customer vigilance in fighting debit card fraud as well. Over half (52%) said giving customers access to view transactions, statements and other information online was "very effective" at detecting this kind of fraud. Only blocking and reissuing breached debit cards ranked higher.
"Nearly all FIs provide customers access to online information service to view transactions and statements. The effectiveness rating, which is somewhat high, seems to indicate some reliance on customers detecting fraud when other methods did not block the transaction from occurring," the Fed reported.
Check, wire and ACH fraud
According to the Fed survey, nine out of 10 FIs gave customers online information services and consider it an effective way to mitigate check fraud. What's not effective, however, is customer education on check fraud — FIs ranked it eighth out of nine fraud mitigation methods.
In addition, at least half of the respondents said that giving customers online information services to view transactions, limiting ACH origination to domestic transactions and allowing customers to file disputes online were "very effective" risk-management methods for mitigating ACH fraud.
The Federal Reserve also found that telephone callback verification, dual control/approval for originating company wire initiation and signature verification were "very effective" at fighting wire fraud.
The two biggest things keeping financial institutions from doing more to fight fraud were cost and privacy restrictions, according to the survey. Those were followed by a lack of staff and tools, as well as low access to information about emerging fraud tactics and corporate reluctance to share information "due to competitive issues."
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