Utilizing Disruptive Innovation to Benefit Your Credit Union & Members

Every day, there is a new story about how innovative technology is altering the landscape of industries ranging from health care to banking. The business world is littered with examples of how technology has disrupted entire business models and caused a chain reaction of competitors rolling out similar innovations. Increasingly, these technologies are not hidden away in back offices, but permeate our lives, impacting how we interact daily, engage with our friends and families and, of course, how we transact.

Those of us in the credit union industry know that technological innovations are playing a major role in transforming the financial services landscape. Technology has continued to be a key driver in operational productivity, but the adoption of technology by members in nearly every aspect of their lives is also changing the definition of service. Members now define service beyond person-to-person interactions at branches – it extends to how well credit unions provide access to the information and services members want, when they want it and how they want it. It is not about just having the information available, but delivering the same service experience across whatever channels your members choose. Creating and delivering on seamless service experiences will certainly be a challenge for credit unions as they are competing in a marketplace with entities that are making significant capital investments in innovative technologies.

Another area where disruptive innovation is changing the credit union industry is fraud. While counterfeit card fraud continues to decrease as chip cards have become the standard throughout the world, it is certainly no surprise that fraudsters did not give up just because it is now harder to counterfeit a physical card. Last year alone, the industry experienced over 15 million identity theft victims. Online, credit unions have experienced increased fraud-related losses of 26% since 2016. Fraud is a multi-billion dollar industry, and we continue to see fraud shift across multiple channels. In some cases, it entails starting with one channel and stealing pieces of information there before moving on to another channel to perpetuate fraud.

One example of the changing face of fraud is how fraudsters have returned to phone fraud with a vengeance. Prior to implementing chip cards, approximately one out of every 1,300 calls into a contact center was from a fraudster. That number has increased to one out of every 900 calls.

How do credit unions address a multi-billion dollar fraud industry that continues to innovate in order to commit fraud against members, while at the same time addressing the demands of members for less friction and a great service experience across all channels?

The answer is that credit unions must build and deploy their own arsenal of disruptive innovation to address both these needs.

Some credit unions may choose to address fraud and security problems as they occur on whatever channel they appear – similar to playing a game of “whack-a-mole.” Or they treat members as suspects in a crime scene investigation every time they interact with your credit union. For example, members may find themselves locked out of their account after three failed login attempts, with no way to unlock the account until the credit union opens on Monday morning. Or they may be forced to answer a series of questions in order to prove it is them actually purchasing the item prior to every authorization. While these approaches may result in lower fraud losses, neither is recommended.

First, the fraudsters already have access to all of the personal information and credentials of your members through various account takeover schemes. In addition, they have already invested millions of dollars in technology to crack passwords, install sophisticated malware and discover other entry points into your credit union while you are spending all your time putting your members under a hot white light in a dark interrogation room.

Second, even if you are able to prevent fraudsters from accessing accounts using these CSI-like tactics, you will likely lose members to other financial institutions that have already taken steps to define a better service experience across all channels and are working to change the dynamics of security. Your credit union’s fraud card loss may have gone down one basis point, but sales volumes may have decreased as good transacting members terminate their relationships with your credit union on the other end of the balance sheet. It is about finding an equilibrium between security and experience.

There is a better way: Fight fire with fire. Credit unions should consider leveraging innovative technology to disrupt the fraudsters while improving the service experience across all channels. For example, PSCU is leveraging the latest in phone printing technology to analyze member calls and assign a phone risk score, stopping millions of dollars in fraud by determining it was a fraudster making the call, even when they had all the right answers to the questions. This is just one example on one channel. Credit unions must start thinking about all of their channels and map out the variances in the member experience and for fraud protection.

PSCU is also utilizing another innovative approach – Linked Analysis and advanced machine learning. Linked Analysis uses cross-network analytics to create a 360° view of a member to link events across different platforms, individuals across different institutions, merchants across any card, and all of these points to each other. Leveraging this technology enables PSCU to recognize a similar pattern across multiple credit unions on various channels to put proactive risk strategies in place to stop fraud before it happens.

One example of Linked Analysis in action is using it to identify unusual activity within interactive voice response (IVR). The technology may determine the same phone number recently accessed the online channel and also connected with a contact center agent 20 minutes later. Each of these events would not arouse suspicion on its own, but they create a potential fraud pattern when considered together. The result is that potential fraudulent activity is identified prior to the fraud event occurring.

So, how can credit unions leverage innovative technology on an individual basis?

Start by reviewing all of your channels. What is your security process today on each one? How does it vary? What is the experience to enable your members to perform the transactions they demand as part of the service you provide? Every channel and process including phone, online, contact center and the branch should be reviewed. What is the cost of member attrition due to the experience you created as opposed to your fraud basis point savings? This is why PSCU has made the investment in tools to deliver both industry-leading sales to fraud loss ratios and best-in-class false positive ratios. We believe a focus on member experience must be at the center of any proposed solution to create the right balance. Then develop a holistic strategic plan on how to address fraud and security across all channels.

Putting the right balance of security and member experience in place across all channels may seem overwhelming. However, once the analysis is complete, you might be surprised how much you can leverage innovative technology through various partners to help achieve strategic objectives to address fraud while creating a better service experience for your members.

The fraudsters have already started implementing their 2019 strategic plan, and you are on the list. The time for credit unions to create their own plans to counteract them with disruptive innovation is now.

Jack Lynch is SVP and Chief Risk Officer for PSCU and President for CU Recovery. He can be reached at 727-561-4769 or jlynch@pscu.com.