MADISON, Wis.-The rise of credit card fraud and identity theft over the last few years has forced the cooperative movement's largest insurer to change its approach to attacking the problem.
But a lack of current data could keep processors, issuers and insurers from deploying new strategies for responding. "A few years ago there was a huge amount of fraud in the industry and that fraud was happening because many credit unions and even banks didn't have all the tools that were available in the fraud protection market," said Chuck Cashman, director of product management for CUNA Mutual Group, adding the insurer was paying out $2-$3 for every $1 it was taking in for portfolio fraud protection. "You can't sustain an insurance product with that type of loss ratio."
In the past, CUs simply relied on the insurance they purchased to protect them from fraudsters. As the payouts became more unsustainable, CUNA Mutual began a "full court press" to get credit unions to embrace fraud prevention tools. To hasten their adoption, the insurer also levied a deductible on insured card portfolios, forcing CUs to absorb more of the potential losses.
Loss Ratio At Acceptable Level
"Now we feel between the best practices that CUs have implemented along with the deductible that the loss ratio is now at an acceptable level," said Cashman. "I don't want to suggest that the fraud problem is going away by any means, but the credit unions are taking on the losses. We started to flatten out our rates, and in many cases we are reducing our rates for plastic cards."
"What we're seeing is that [insurers] are increasing aggregate deductibles and a $10,000 limit for a credit card is pretty common now," said Jeanne Reddrick, director of marketing at San Antonio-based SWBC Insurance Services, who noted that a $500 per-card deductible is now standard practice in the industry, as are lower credit card limits to mitigate the damage a compromised card can do.
Christopher Taylor, president of financial enterprises at Schaumburg, Ill.-based Zurich North America argued that, despite the economic downturn making some individuals more desperate and brazen, CUs should not necessarily expect their fraud losses to worsen in this market.
"Fraud never takes a holiday," he said. "The rule of thumb says that when the economy is very tough that people get a bit more bold in what people may do but the reality is credit unions are lot more diligent against fraud today than they were (several years ago)."
Credit unions should nevertheless prepare for a "hard market" of higher prices and higher deductibles as soon as this year, according to Nick Grant, CEO of SWBC's Property & Casualty Division. Increased claims across the board caused by the protracted economic downturn will likely push insurers to examine up to seven years of both credit and fraud loss histories, versus the current requirement of five years.
Still A Major Problem
Despite rapid adoption of anti-fraud protections, the issue is still a major problem for issuers and processors, which relied on nationwide statistics compiled by MasterCard and Visa. But when the two card giants became publicly traded entities in 2006 and 2008, respectively, that data stopped coming.
"If you want to reduce fraud, you have to know how much fraud there is in order to write a business case to develop new products and services to combat it," Cashman pointed out.
In a letter sent last October, the Credit Union Risk Council asked Visa for, among other things, CU specific statistics on fraud. The card processor demurred, arguing that such statistics were "confidential and proprietary."
Visa's Response
In a reply letter, Visa Senior Business Leader of Payment System Risk Martin Elliott said individual credit unions could take advantage of its Issuer Risk Key Indicators Program, which allows issuers to "upload monthly data to Visa and, in return, receive secure, customized peer and industry reports and performance ratios."
In response to CU Journal queries about credit card fraud data, Visa Spokeswoman Sandra Chu said, "Visa fraud rates have remained steady near historic lows, enabling cardholders to use Visa with confidence. In fact, global fraud rates have declined by more than two-thirds in the past two decades to less than 6 basis points (or less than 6 cents out of $100 transacted, a small fraction of 1%)." But Chu declined to elaborate on why Visa no longer provides detailed national fraud statistics.
While the industry "has pretty much stabilized" for insurers, and the IRKI program could help issuers, processors are left more or less in the dark.
The lack of information, Cashman indicated, has essentially locked insurers and processors in to their current set of products and services because they do not know what constitutes a logical investment in fraud combating tools as there is no data on how much the problem is costing CUs across the country.
