Keeping Ahead of Fraud

CU 360
June 19, 2007

A surprising number of financial institutions continue to be reactive rather than proactive regarding card security and identity theft, choosing to focus on correcting breaches and data thefts after the fact, according to research from Javelin Strategy and Research in Pleasanton, California.

Although most financial institutions surveyed by Javelin are moving into the areas of prevention and fraud detection strategies, "most still emphasize the resolution of identity fraud" as the main course of defending their customers' information and assets, according to Javelin.

Financial institutions are making several positive steps, such as dropping paper statements and applying the ubiquitous zero-liability standard on ID theft fraud. But they're slow to adopt other protectionist policies. Only half of the institutions surveyed offer 24/7 account suspension capability, and none offer integrated credit bureau information to customers that could alert them to early fraud use.

For 2006, plastic card fraud losses at credit unions with insurance coverage from CUNA Mutual Group are already ahead of last year's pace, which totaled $89 million.

"There's some improvement in that banks continue to focus on the resolution side of things," Javelin research analyst Bruce Cundiff tells Bank Technology News. But banks have largely been "unwilling or haven't explored" many avenues such as user-defined limits on transactions or prohibiting the use of Social Security numbers for logins or enrollment. "We definitely see the need to bring consumers more into that process, and empower consumers to help banks in those overall protective measures."

Other shortcomings, according to Javelin, included:

• Only 29% of financial institutions offered next-day availability of stolen funds.
• Just 36% of financial institutions let consumers set limits on large-value transactions or withdrawals.
• No financial institutions in the survey had policies in place permitting consumers to limit or prohibit online or international transactions.

Why are most financial institutions falling short on enlisting consumers' help in fighting fraud? Cundiff believes many anti-fraud staff at financial institutions are geared toward tracking and investigating fraud, not detecting and preventing it. There's also a bottom-line perspective in play: a lack of enough pain in the industry's bottom line.

"I've spoken to a number of large banks, and they tend to think the task would be too onerous, based on the economic results," Cundiff explains. "I think banks are unwilling to go it alone, and are looking for the card associations to enact that level of detail through check cards."

One problem for financial institutions looking into adopting consumer-driven account oversight is the onerous IT challenge. "It sounds simple on the surface, but it can be a maintenance nightmare," says Jim Maloney, chief security officer at on-line banking vendor Corillian. Putting rules on transactions would have to traverse bill-pay, payments, demand deposit accounts, and remittance departments.

This article was prepared by the staff at CU 360 and is published online at http://cu360.cuna.org. Reprinted with permission.