Cyber World Creates New Liability Risks for CUs

June 16, 2010

By Chuck Cashman

The evolution of the cyber world and virtual servicing are creating an emerging set of risk exposures for credit unions known as “cyber liability.”

These risks are linked to security incidents or direct breaches of credit union data, unlike the highly publicized third-party data breaches, such as Heartland and TJX.

These new risks create additional liability for credit unions, including member data breaches on a credit union’s system, new exposures from social media sites such as Facebook and Twitter, and other problems caused by computer malware and viruses.

In 2009, a report by the Identity Theft Resource Center reported nearly 500 data breaches exposing more than 220 million records (although the records number can be much higher due to non-reporting).

In addition, the 2008 CUNA Technology & Spending Survey Report stated more than 40% of credit unions experienced at least one incident of ID theft in 2008.

In addition, more than 20% experienced online fraud, and 4% reported a data breach over that same time period.

Clearly, with member data stored in numerous places, especially electronically, the ability for outsiders to gain unauthorized access continues to be a growing problem.

Further, it’s relatively easy to distribute electronic data to inappropriate destinations, whether through intentional acts by employees, simple mistakes, or employee ignorance, which puts member data in even more jeopardy.

The most notable risk of cyber liability is financial loss. Credit unions not only face the direct loss of funds from a data breach, but also recovery costs.

A recent Ponemon Institute study states that in 2009, organizations spent more than $200 for each record compromised in a data breach.

Seventy percent of this amount resulted from indirect costs, such as customer turnover, while 30% resulted from direct costs, including notification and litigation. According to the study, the average breach cost $6.8 million.

Another risk, though not so obvious but equally important, is to the credit union’s reputation. How would members respond to a breach at your credit union?

Publicity from such an event may not only be reflected in the loss of current members but might make potential new members reluctant to join your credit union.

Further, highly publicized breaches have caused such mistrust that some organizations have been forced to downsize, discontinue operations, or go out of business altogether.

Data breaches within a credit union can happen in a number of ways:

  • A credit union sends a mailing with members’ account numbers printed on the mailer;
  • Someone steals a credit union employee’s laptop, which contains confidential member information and account data’
  • A fraudster hacks into a credit union’s ATM server, stealing credit and debit card information to commit unauthorized transactions; or
  • A credit union loan officer steals personal member data and fraudulently obtains thousands of dollars in loans attributed to members.

You can protect your credit union and members by:

  • Understanding your potential risks and exposures. Have a third party conduct an analysis of your response plan and policy.
  • Routinely testing your disaster recovery plan, including recovery from a data breach.
  • Protecting your credit union by having cyber liability insurance and making sure it covers data breach liability, member ID theft protection and restoration, and card/check replacement.

Chuck Cashman is a director in credit union protection product management for CUNA Mutual Group. Contact him at 800-356-2644, ext. 7161.