The reality is that fraud happens. On average, credit card issuers experience approximately six basis points of loss every year ($600 per $1 million in charge volume), which is low compared to the 18 basis-point peak in the early 1990s. The annual cost to U.S. issuers is estimated to be $1 billion.
Building sufficient fraud losses into your pro forma P&L calculations will help you as an issuer prepare for the inevitable. While fraud may be inevitable, it is vital to understand that how an issuer handles fraud - both preventively and reactively - has a tremendous impact on credit union members and their level of satisfaction.
Educating members is one way to make them less vulnerable to fraud. Consumers today are relatively savvy about protecting their data, knowing full-well that data breaches and stolen card information are rampant. Yet, issuers need to reinforce what cardholders may already know by reminding members to shred all documents containing account data and to be vigilant about reviewing their credit and debit card statements to be sure the charges are theirs.
It's not too rudimentary to remind cardholders to contact their credit union as soon as they identify something amiss on their statements or if a card is lost or stolen. Effective reminders are easily implemented using statement messages, inserts to plastics and statements, or an annual letter to cardholders.
The crux of the challenge with effectively handling fraud is maximizing the cardholder experience while minimizing the risk of fraud. Issuers should work with their service providers (both credit and debit) to develop customized neural network strategies to meet their specific needs, to properly balance risk against the cardholder experience at the point-of-sale and to enable the issuer to rapidly detect and react to new fraud trends. Fraud prevention/detection is not a one-size-fits-all strategy. Technology is available today that can look at transactions in real time; every authorization can be monitored as it happens. This technology, combined with human oversight provided by fraud analysts and call center staff, can flag suspected fraud and compare the actions with the cardholder's purchasing profile history.
When data breaches do occur, issuers can handle the member-cardholder experience in two primary ways: (1) reissue the card or (2) monitor the account aggressively. Automatically reissuing a card may be very inconvenient for members if they need to update card information for all their recurring transactions on that account. Part of human nature is being averse to change. Not every data breach warrants an automatic card reissue. Some data breaches may have happened years ago, for example, and were just detected recently with no adverse consequences. Rather than issuing a card with a new account number, an issuer may choose to more closely monitor transaction activity for the cardholder.
Bad Experience, Made Better
If fraud occurs, the cardholder's experience should be made as positive as possible. To preserve or encourage a long-term member relationship, credit unions need to assure the member that any fraudulent charges will be immediately removed from his or her account, and a reissue card will be delivered as soon as possible.
The member service aspect of fraud management cannot be overstated, and it's important to work with a service provider who has the same service values that you do.
Fraud management, as with most of life's challenges, can be achieved with the proper balance and some planning. Member education, customer service and the support of a customized neural network can help avert and detect fraud.
Ted Keith is President of Primax, a provider of customizable, high-quality card-processing programs, products and services. For info: www.primax payments.com.
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