How Advanced Tools Such as AI Can Help CUs Curb Fraud in the Digital Banking Age

Technology has become foundational to society as the pandemic continues to impact all corners of the globe. Consumers have rushed to digital channels to tackle daily tasks including grocery shopping, handling healthcare appointments and meeting banking needs. As individuals focus on online platforms and mobile apps, organizations have been forced to follow suit or risk seeing consumers flock to digitally savvy competitors.

Few organizations have had to respond to this digital shift as rapidly as those in the banking sector, especially credit unions. Kelly Albiston, senior vice president and chief technology officer of digital product development at Mountain America Credit Union (MACU), explained that the volume of Paycheck Protection Program (PPP) loans and stimulus payments that passed through his company intensified its needs for infrastructural innovations.

“We have experienced a much greater need to enhance self-service experiences as face-to-face interactions became challenging during the pandemic,” he said. “This includes continued investment in services like account opening and consumer lending applications, as well as [continuing to enhance] card-related services.”

This trend is not exclusive to MACU, and some CUs opted to increase their investments in key services by merging. The National Credit Union Administration’s (NCUA’s) Insurance Report of Activity revealed that 43 mergers were approved in Q3 2021, nine more than were approved in Q3 2020. Twenty-eight of these mergers occurred because CUs wanted to expand their offerings, and eight could be attributed to poor financial conditions. CU merger rates are expected to continue rising in 2022 as smaller credit unions aim to expand the digital services available to their members by integrating with larger organizations.

Data Breaches Pose Challenges

Digital expansions and mergers are boosting user accessibility and helping CUs meet members’ new demands, but these shifts also have generated several challenges. Chief among them is fraud: More than $154 million in fraud losses were reported globally in 2020, and 56% of consumers in the United States claim they have been victims of fraud over the past two years.

“With all the data breaches in recent years leaking a lot of personal information into the wild, the know-your-customer (KYC) process continues to be challenging as [MACU] enhance[s] more self-service capabilities,” he continued.

The rise in online profiles — combined with many consumers’ less-than-ideal digital hygiene — has contributed to a steady increase in fraud. The issue has not gone unnoticed by credit union members, either. PYMNTS’ data shows that 11% of CU members use tools and services from financial institutions (FIs) other than their primary CUs because they believe their data is less likely to be stolen when they do. This means failing to adequately clamp down on fraud and neglecting to innovate could chip away at CUs’ typically high member approval ratings.

“Keeping bad actors from opening accounts is challenging, but existing members are also at risk of falling for scams or having access to their accounts compromised by ever-evolving techniques used to gain passwords and intercept multifactor authentication PINs,” Albiston said. “These threats, along with the speed at which money can now flow out from accounts through new channels, present a greater risk for fraud.”

AI and ML Lead the Anti-fraud Charge

Fortunately for CUs, numerous ways to combat fraud exist and provide the personalized customer experiences members expect. Albiston said while some fraud is bound to occur, MACU’s goal is to minimize the number of instances and their impact. Advanced technology now incorporates artificial intelligence (AI) and machine learning (ML) to weed out fraudsters while creating minimal friction for genuine users. Part of this approach entails allowing the technology to better establish what constitutes legitimate member behavior based on members’ histories and device usage.

“Like all security, it takes a very layered approach to be successful,” he explained. “We use … identity services to establish our KYC processes, which have been very effective at minimizing account-opening fraud. We enhanced authentication services that profile member devices and prompt for step-up authentication from unknown devices.”

Albiston also said implementing biometrics can help CUs distinguish bad actors from members and that tapping AI and ML to examine money movement across channels and even internally can enable credit unions to spot fraudulent traffic. Additionally, he said MACU supports credit-lock and account-creation tools that notify members in real time about access and changes to their accounts.

Credit unions are moving quickly to roll out digital innovations that can help them compete with FinTechs and digital-only banks, and some are partnering or even merging with other CUs to make these developments a reality. Keeping fraud to a minimum will be imperative as they make these shifts, however. There is no universal fraud protection formula for every institution, but leveraging AI, ML and other advanced technologies can give CUs more muscle to thwart sophisticated bad actors while keeping interactions smooth and convenient for members.