Trust and Data Give Credit Unions a Cost-Effective Edge When Fighting Fraud, Says PSCU

For financial institutions — credit unions, especially — fighting fraud is a nuanced battle.

Karen Postma, managing vice president of risk analytics and fraud services at PSCU, told PYMNTS that FIs are grappling with the rising tides of first-party and third-party fraud. The pandemic has been an accelerator of both types of fraud — but in different ways.

First things first — namely, making the distinctions between first- and third-party fraud.

Delving into the details and distinctions, Postma said that first-party fraud occurs when then the consumer who’s reporting a transaction as fraudulent has actually participated in that transaction.

Within that designation, she said, there are some nuances. The fraud could be unintentional.

“I think we all might be guilty of ordering things online and then forgetting we did so,” said Postma. “Or ordering something — only to see your statement [a month later] — and not remembering who the merchant was.”

There’s also intentional first-party fraud, said Postma, when the consumer knows a particular payment is not a fraudulent transaction — but they’re reporting to the FI that it is.

“This was a particular problem during the pandemic and still is,” she said. “It’s much easier for people to participate in this type of fraud because transactions are not happening face to face. They’re not getting the merchandise right away, and so there can be some ambiguity in these transactions.”

“This was also a way for consumers to receive goods and services that they felt they needed without having to necessarily have the money to get them,” she added.

Assuming Someone Else’s Identity

Third-party fraud occurs when bad actors use victims’ identities and personal information to commit fraudulent transactions or steal merchandise that’s delivered to them as they wield those personas.

The current rocky macroeconomic climate has given rise to more third-party fraud, she said. The pandemic helped give third-party fraud some tailwind, as many people found themselves out of work when COVID-19 hit and were looking for other avenues to generate income.

And the fraudsters are nothing if not patient. They’ve learned to start out with smaller transactions, to see if they can get away with crime undetected, and now they’ve branched out into larger transactions with increasing frequency. Despite the economic rebound from the darkest days of the pandemic three years ago, “this has still been an easier, non-technical way to get money,” Postma said.

For the credit unions (CUs) fighting fraud — no matter the flavor, no matter whether it’s first- or third-party — it’s essential to reassure members that their data is being kept safe and private.

“Credit unions inherently have this relationship with their members, and there’s trust in place that’s greater than the trust they might have in some of the big banks or the FinTechs,” Postma said.

That trust can be leveraged, as CUs seek to educate individuals about the efforts they are making to enhance data security, she said.

Against that backdrop, she said that geolocation technology, biometrics and one-time password (OTP) can offer lines of defense against fraud that improve upon traditional methods of address verification and mother’s maiden names that suddenly don’t feel like robust ways to protect consumers in the digital age.

The CUs seeking to educate their members about fraud risk and emerging scams — and the tech that can help mitigate those threats — need to take a proactive, multi-pronged approach to reaching those individuals.

“It cannot just be a Facebook post,” she said, adding that “there needs to be a multi-social media component, an update on the website, an update ‘behind’ the online banking site and an email notification. Being able to understand preferred methods of communication in order to alert members is going to be the best way to get the message across in the most effective way.”

Looking Ahead

In the meantime, the macro pressures are hitting CUs, and budgets remain constrained. Joint research from PYMNTS and PSCU revealed that only about 27% of CUs said they are investing in fraud management systems as recently as 2022.

However, security and fraud protection are not the areas where CUs should cut. Economic conditions are a catalyst to increased fraud. Postma emphasized that the investment dollars that are being allocated to fraud prevention can be well-spent by slotting those dollars to machine learning and other advanced technologies.

“Those investments will pay dividends in the future,” Postma told PYMNTS.