Embrace EMV to deescalate plastic card fraud

While not the end-all-to-be-all, the EMV (Europay, MasterCard, and Visa) technical standard offers card-issuing credit unions the best protection against the growing epidemic of plastic card fraud.

Trends point toward 2017 being a record year for fraud, according to a CUNA Mutual Group risk consultant. And an October 2016 Nilson report projects worldwide fraud losses will total $31.7 billion by 2020.

Despite new tools and technologies to fight fraud, the fraudsters continue to have the upper hand, Robert Jarosinski tells attendees at the America’s Credit Union Conference.

“After signs of progress in 2016, the situation is getting worse again,” says Jarosinski, a senior consultant for CUNA Mutual Group’s Risk and Compliance Solutions. “Several factors, including slower-than-expected merchant conversion to EMV and delays in shifting fraud liability to retailers are compounding the situation.”

Gas station adoption of chip-embedded EMV cards has now been pushed back to 2020, instead of 2017 as originally planned. In addition, card issuers will no longer be allowed to charge back non-EMV merchants for purchases under $25 and can only charge back 10 fraudulent transactions per account.

Familiar fraud-causers such as card “skimming” and data breaches continue to be troublesome. “FICO reported card skimming losses were up 70% in 2016 compared to 2015, and that’s on top of a whopping 546% year-over-year increase from 2014 to 2015,” Jarosinski notes.

Likewise, system and procedural problems with card verification values used for online purchases are driving up losses for card-not-present transactions.

At the same time, new fraud trends are emerging. One involves “fallback transactions,” which Jarosinski says occur when normal chip transactions cannot be completed at chip-capable terminals due to technical issues with the terminal or chip. As a fallback, purchases proceed as magnetic stripe transactions, with any fraud liability falling on the issuer.

Another emerging trend, dubbed “friendly fraud,” occurs when legitimate members knowingly or unknowingly make false claims to their card issuer about a purchase.

“For example, an individual cardholder could claim that the $1,000 charge on their account statement for a new flat-screen TV never occurred, despite the fact the TV is hanging on their living room wall,” Jarosinski says. It’s difficult for a card issuer to prove that a reported fraudulent transaction is actually legitimate, and retailers aren’t always eager to help investigate, he adds.

“The only way to prevent plastic card fraud is to eliminate your plastic card programs. But that’s not an option, so you need to find the right balance between security and member experience,” Jarosinski says.

Converting to EMV chip-enabled cards is still the best bet for credit unions to proactively manage their card-present fraud losses. Visa reports counterfeit fraud is down 52% for merchants that adopted EMV.

Jarosinski urges conference attendees to establish success metrics for fraud, including false-positives. “Work with your processor to get the information you need to evaluate the cost of fraud versus the cost of solutions, and know the available levers you can use to make changes.”

Mitigating fraud losses requires continuously looking for ways to identify, assess, and control risk. Jarosinski advises establishing key performance indicators to understand and monitor areas of success.

“Fraud evolves constantly, and you can’t afford a ‘set it and forget it’ mindset with your protection tools,” he says. “Keep your success metrics in mind as you adjust rules in response to changing fraud trends.”

For more coverage of CUNA's America's Credit Union Conference, check out CUNA News and follow the #CUNAACUC hashtag on Twitter.