Identity Fraud Decreases, but Other Losses Rise

CUNA¡¯s E-Scan online research portal
March 28, 2011 | COMMENTS

When it comes to fraud affecting the financial services industry, there¡¯s good news and bad.

On the positive side, arrests related to fraud and financial crime have doubled, prosecutions have nearly tripled, and convictions have nearly doubled since 2008, according to a study last year by Javelin Strategy & Research. Most of this action has come directly from financial institutions' use of fraud identification and prevention technology, increased fraud reporting, and cooperation from law enforcement agencies.

In 2010, identity theft and fraud claimed fewer victims than in any other period since Javelin began conducting surveys in 2003. Driving that decrease was the reduced rate of existing account fraud, although incidents of all types of fraud dropped from 2009.

On the other hand, consumer costs¡ªthe average out©of©pocket dollar amount victims pay¡ªincreased. Much of this increase is attributed to new-account fraud, which showed longer periods of misuse and detection and therefore more dollar losses than any other type of fraud, according to Javelin¡¯s 2011 Identity Fraud Survey Report.

¡°Identity criminals are the common enemy of individuals and businesses, and with so many emerging technologies, there¡¯s tremendous opportunity for education, innovation, and action,¡± says James Van Dyke, Javelin¡¯s president.

Key strategies often overlap in protecting the financial institution and protecting cardholders. Tips reported in Independent Banker include:

* Adopt early-detection technology. Neural-network technology is the backbone of any effective fraud mitigation program, helping to recognize potential fraud early on.

Many neural-network technologies offer the ability for customization so institutions can set the rules and parameters for notification and scoring.

* Monitor constantly and take quick action. When using neural-network technology, it¡¯s vital to develop processes to monitor and take quick action in the event of suspicious activity. This responsibility falls squarely on financial institutions.

Many electronic funds transfer (EFT) networks also provide fraud-monitoring services. They will monitor and notify financial institutions about suspected fraudulent activity, and they will report fraud trends in different areas of the country.

* Secure your network integrity: Most people recall the names Heartland Payment Systems and TJX Company¡ªtwo firms that suffered the largest data breaches in history. Attacks from fraudsters and hackers occur daily, affecting all organizations that deal with electronic currency.

Financial institutions must continually monitor, update and test the integrity of their networks, and immediately respond to any potential violation of that security.

Many organizations can assist with the security functions of information technology systems by performing detailed analysis, penetration testing, firewall and intrusion testing, and an overall examination of the IT and network system.

* Educate inside and out. Designate a fraud-prevention leader to follow fraud trends and industry attacks, develop processes to mitigate those trends, and educate your staff about those trends.

Educate cardholders, too. By providing the necessary information to cardholders to avoid instances where fraud is likely, financial institutions go directly to the source of potential problems. An informed cardholder can more easily recognize and avoid fraudsters' attempts at collecting card information or tricking cardholders into performing fraudulent transactions.

E-mailing a monthly newsletter with articles covering new fraud trends and tips to avoid fraud can be helpful to cardholders. Another avenue would be a public website, with best practices or links to additional information regarding fraud prevention.

Staff education can take place informally or formally. Occasional mass e-mails, a weekly or monthly staff meeting, or an internal newsletter will go a long way toward empowering your staff to protect sensitive information.