Over the last 18 months, there has been a tremendous increase in plastic card fraud, and it is continuing, seemingly unabated. CUNA Mutual Group, a fidelity bond insurer for more than 94% of all U.S. credit unions, pioneered plastic card fraud coverage for its bond policyholders; and credit unions are the only financial institutions that have this coverage available today.
There's been much publicity over the past few years about the theft of debit and credit card information from databases at several nationally known retailers. The information was allegedly being retained in violation of card association rules.
These breaches, coupled with other fraudulent activities such as "phishing" and counterfeit "skimming," have resulted in our paid claims significantly exceeding premiums received for plastic card coverage. Our total paid plastic card claims for 2005 were more than double those paid in 2003, and 54% higher than those paid in 2004. And we're not off to a very good start in 2006. These claims cost CUNA Mutual and credit unions significant money.
A Huge Impact Being Felt
Plastic card fraud has had a huge financial impact on CUNA Mutual overall. We have increased deductibles and rates for policyholders with the most significant losses, yet we continue to see higher loss ratios due to the increased fraud we all read so much about.
We continue to provide plastic card coverage, but together we need to find a solution for this runaway claims situation. We have extensively assessed the environment of plastic card fraud, including the current and emerging causes of fraud losses. We have developed additional loss prevention training programs and tools to help credit unions address this challenge to their profitability and ability to provide competitive plastic card programs for their members. Our 23 risk managers, located around the country, have devoted the majority of their time this past year meeting onsite with credit unions with significant card losses, and this focus will continue.
CUNA Mutual has worked extensively with plastic card processors that support credit unions' card programs. We have been strong advocates by encouraging them to actively promote loss prevention services and tools, as well as develop and offer additional tools that will help significantly reduce plastic card fraud losses.
We have shared our concerns with the card associations about the continuing card compromises that occur at one retailer after another as a result of the associations' ineffectiveness in enforcing their own compliance rules. To further reinforce our concern, we filed a lawsuit to recover $5 million in losses for CUNA Mutual and almost 200 Bond policyholder credit unions due to a card compromise at BJ's Wholesale Club, which, like so many other merchants, retained the full magnetic stripe data after the authentication of a transaction.
Marc Krasnick, who leads our Credit Union Protection division and others on his team, have spoken at conferences and forums coast-to-coast to increase credit union awareness of this major and growing threat, and we have urged everyone to be even more diligent in taking every measure possible to reduce their exposure to plastic card fraud. These presentations will continue in 2006, and we will continue to sponsor webinars, peer forums, and other events for policyholders to learn about best practices.
New People Brought In
Last month, we hired Chris Ryan to a newly-created position to work with plastic card processors. Chris was most recently Director of Global Fraud Solutions for Fair Isaac, a leading provider of neural network loss prevention solutions for credit unions and other financial institutions. In his role at CUNA Mutual, Ryan will lead efforts with card processors to develop and promote plastic card best practice security measures for policyholders, provide fraud prevention consultation to credit union policyholders, and work internally to develop effective strategies and solutions to reduce fraud losses.
Despite all of these efforts, the reality is plastic card losses continue to climb to unacceptable levels as fraud schemes become even more sophisticated. So, earlier this month, we sent our bond policyholders, who have our plastic card coverage, a Plastic Card Security Best Practices document that we developed based on our work with credit unions, card processors, and industry experts.
We found in our discussions with credit unions that many believe they have all of these security measures set up, only to find after a fraud occurs with their cardholders, that this is far from the case. We need all credit unions to take action today. These security measures are your best chance to fight this ongoing threat to the very existence of your plastic card program.
We urge credit unions to work with their card processors to review their programs and revisit their existing security settings and control files on an ongoing basis. Anything less will result in continued fraudulent activities and mounting losses.
Where The Bottom Line Lies
The fight against plastic card fraud is our No. 1 priority. As stated previously, we will continue to provide our policyholders with risk assessments and loss prevention education and tools, Webinars, peer forums, RISK Alerts, and direct access to our plastic card fraud prevention experts. We are urging the card associations to better enforce their own rules, and using the judicial process to force behavior changes by merchants.
More than 800 credit unions are expected to attend our best practice Webinars this month alone. That's encouraging. We will continue to offer additional Webinars throughout this year on additional ways credit unions can reduce their exposure to loss.
The bottom line, though, is that we need to work together to reduce losses. If we don't, the whole business proposition for credit unions providing plastic cards to their members could be in jeopardy.
Jeff Post is president & CEO of CUNA Mutual Group.
