Targeted Friction Helps Credit Unions Fight Fraud as Attacks Surge

With the world existing more online than ever, fraud attacks targeting financial institutions (FIs) are a growing threat. Criminals are increasingly succeeding in exploiting the vulnerabilities in FIs’ systems, with approximately 59% of FIs experiencing an increase in their overall fraud rates in 2022, according to PYMNTS research. Credit unions have been particular targets. According to one report, nearly 70% of CUs and community banks experienced first-party fraud, involving individuals mispresenting their identities, situations or intentions when interacting with FIs.

The impact of all this fraud is considerable. PYMNTS found that for nearly 6 in 10 FIs, the dollar cost of fraudulent transactions rose in 2022, with an average loss of 1.29 basis points per transaction. For CUs specifically, the data is similarly grim: 41% of community banks and CUs estimate that their fraud losses in the past 12 months ranged between $500,000 and $1 million, and 20% estimate even higher losses, costing between $1 million and $10 million. There are also reputational harms, with surveys finding that many consumers will look to switch FIs after a fraud event, and some consumers might not start doing business with the FI in the first place.

The “Credit Union Tracker®” explores how CUs can secure members against the rising threat of fraud.

Around the Credit Union Space

On Jan. 20, Members Trust of the Southwest Federal Credit Union filed notice of a data breach with the Texas attorney general. The filing revealed that thousands of victims had been affected by a recent data breach stemming from a cyberattack on the Houston-based CU, exposing members’ confidential personal details, including names, driver’s licenses and Social Security numbers.

Another type of attack targeted FIs in the Northeast. Maryland’s Freedom Federal Credit Union and several other FIs recently suffered a credit card bank identification number (BIN) attack. In a BIN attack, criminals use sophisticated software to guess credit card numbers, making unauthorized charges when guesses align with real card numbers. Freedom FCU notified its members of the attack and reimbursed those impacted.

For more on these and other stories, visit the Tracker’s News and Trends section.

An Industry Insider on Balancing Security With Seamlessness

As the perennial fraud problem becomes more significant, FIs everywhere are working to reduce risk and increase security. In doing so, FIs need to strike a balance between security and seamless banking experiences.

To get the Insider POV, we spoke with Seth Ruden, senior director of fraud operations at First Tech Federal Credit Union, to learn more about the best way to fight fraud without compromising the user experience.

CUs Can Do More to Address Members’ Fraud Concerns

Digital banking users are well-aware that as more consumers handle their financial needs with digital solutions, the risk of fraud grows. According to PSCU’s recent “Eye on Payments” survey, 53% of consumers are more concerned about fraud due to the ongoing shift to online banking channels. Many CUs, however, do not appear to be innovating in response. A 2022 PYMNTS report found that less than 27% of CU executives were investing in fraud management and anti-money laundering solutions — down from more than 57% in 2021 — and less than 26% were investing in security, authentication or digital identity innovations.

CUs can achieve better security by investing in innovative tools to detect and prevent fraud. For example, CUs can replace entirely verbal validation methods with a system that instead leverages data to authenticate members seamlessly via in-house data intelligence solutions or by partnering with competent third parties. If done right, anti-fraud innovations can improve satisfaction and attract new members. According to a recent FICO survey, 74% of FI consumers ranked fraud protection among their top three considerations for opening a new financial account — more than any other factor.

To learn more about how digital tools can help CUs fight fraud, read the Tracker’s PYMNTS Intelligence.

About the Tracker

The “Credit Union Tracker®,” a collaboration with PSCU, examines how fraud threats and losses are mounting and how CUs can protect themselves and their members.