Application Fraud Explodes to the Detriment of CUs & Members

The number of victims of fraudulent card accounts almost doubled between 2016 and 2017, and that may be brewing bad blood between members and card issuers, according to a study by FIS and Javelin Strategy & Research.

The survey of 5,000 people found that the number of people who’ve had a criminal open a fake account in their name rose from 0.9 million in 2016 to 1.6 million in 2017. Total losses for the year due to application fraud were $1.7 billion.

Criminals have also shifted their attention toward debit and prepaid cards, according to the study. Last year, about 3.4 million people “lost control” of their prepaid cards — nearly triple the number in 2016. Debit card victims numbered 6.6 million in 2017, up about 27% from 5.2 million in 2016.

The trend could do serious damage to the relationship between cardholders and card issuers such as credit unions or other financial institutions, it noted.

“Often consumers’ introduction to the world of financial crime is the shock of first hearing a line of credit has been opened in their name. The crime, which is the most popular form of identity fraud, can drive a wedge between cardholders and their issuers,” the report said. “Victims are likely to be placed on the defensive, questioned about any fraudulently opened account. Issuers may not be aware that criminals initially passed their identification process. The clash often results in outsized losses and high resolution times, alienating good cardholders from their issuers.”

In a way, the rise in application fraud has apparently come at the expense of transaction fraud, which has fallen to $8.1 billion in 2017 versus $9.7 billion in 2014.

“Despite the considerable growth in the number of victims where debit and prepaid cards were misused, the amount lost has not risen in kind. In fact, the fraud losses on existing credit card accounts have disproportionately declined,” the study noted. “So while some of this decline may be the result of moving from more lucrative credit cards to lower-limit debit and prepaid cards, this change is also indicative of fraud transactions becoming smaller so as to avoid detection.”

The growing ubiquity of EMV is also a factor in why criminals are turning to application fraud.

“This shift isn’t haphazard — criminals are migrating to card types that are more likely to be magnetic stripe rather than EMV-enabled,” the study noted.

Fraud is nonetheless still costing everyone a lot of time — often to the detriment of credit unions and other card issuers.

“Between transaction and application fraud, the time victims spent resolving fraud more than doubled over the past two years, rising from 45 million hours in 2015 to 100 million in 2017,” it added.

A victim of card application fraud now spends about 17 hours on average dealing with the details — almost three times as long as victims of credit card fraud, the study noted.

“This results, unsurprisingly, in those customers feeling frustrated and often quitting their banking relationships,” it added.

The study recommended that card issuers offer card alerts and other controls, create a holistic remediation process, identify breaches early, issue EMV cards, take advantage of technology to fight card-not-present fraud, use modern identity-verification tools, adjust certain processes to catch application fraud sooner, offer members a way to report fraud digitally and keep them in the loop on disputes.