By Rodney Hood
The world of fraud is dynamic and continues to pose a threat to the financial industry due to its fast pace, inherent risks, and devastating consequences. Just when you think you’re ahead of the game, new tactics emerge, with cyber criminals finding innovative methods to sidestep security technology or break through the human firewall. ‘
The relentless nature of fraud makes it a formidable adversary, particularly for credit unions, where its impact is not only financial but also detrimental to business continuity and reputation. Credit unions are urged to reassess their approach to this threat and prepare for the necessary adoption of new methods for more efficient fraud prevention.
Rising Threats – The Numbers Don’t Lie
According to the LexisNexis True Cost of Fraud Study: Financial Services and Lending Report, “each dollar lost to fraud costs financial institutions a staggering $4.41.” Over $6 billion in losses were attributed to first-party fraud, third-party fraud, and synthetic identity fraud in the U.S. last year, all of which are alarmingly on the rise. These types of fraud pose significant challenges to the integrity of our financial systems.
Examining these rising threats, we see that the financial industry has been particularly vulnerable to first-party fraud; this type of fraud is amplified by the deceptive nature of false information provided by applicants themselves. A study by TransUnion in 2023 revealed that incidents of first-party fraud increased by 17% compared to 2022, contributing significantly to the overall fraud landscape. Third-party fraud, which involves using a stolen identity to obtain credit or services without the victim's knowledge, accounted for losses of nearly $4.6 billion last year, marking a 21% increase from the previous year. Additionally, synthetic identity fraud, a blend of both real and fake information to create a new identity, is on the rise, further complicating fraud detection and prevention efforts. According to a recent survey of fraud executives by the Aité-Novarica group, “synthetic identity fraud ranks as the number one threat.” Ultimately, the marked increase and severity of these threats just further emphasizes the growing concern about fraud and its impact on credit unions.
Impact on Credit Unions
Fraud has far-reaching implications for credit unions; it increases the cost of lending and erodes credit unions' overall financial stability. In 2023, fraud losses in the U.S. exceeded $10 billion, a 14% increase from the previous year. Not only do credit unions suffer direct financial losses due to fraudulent activities, but they also face the risk of reputational damage if members' trust is compromised and with significant hindrances to everyday operations. The gravity of this impact highlights the scale of this rising problem and underscores the need for innovation in prevention measures.
The Future of Fraud Prevention
With the evolving threat landscape, credit unions are forced to face the fact that technology alone just won’t work. An effective method to combat fraud requires a proactive, multifaceted approach. It is a combination of strategies used in concert that will make your credit union threat ready in the fight against fraud. Fraud cannot be fought in isolation; it is inherently a cybersecurity threat that goes beyond traditional financial safeguards and incorporates comprehensive cybersecurity measures to stay resilient.
Think of fighting fraud like defending a castle. Technology is the sturdy walls and a moat that keeps out invaders, but you also need sharp-eyed guards (trained staff) who can spot and stop sneaky attacks. Additionally, when protecting that castle, a commander should confer with those on the front lines to identify gaps in the integrity of the structure to design a truly effective plan of protection. It’s a concerted effort to prevent anyone from breaching the walls because once the enemy is on the inside, the consequences could be devastating. We want the same for our credit unions – stop the threat before it becomes an attack.
So, what does that mean for credit unions? It means a shift in approach, which encompasses leveraging a combination of cutting-edge technology, a well-trained human firewall, and the integration of information security (InfoSec) and fraud teams to create a stronger solution to stop fraud.
One of the most innovative changes we are seeing in fraud prevention is the collaboration of information security (InfoSec) and fraud teams. We understand that since fraud is fundamentally a cybersecurity issue, integrating these teams to share information and work together is essential to enhancing the effectiveness of fraud prevention strategies. Traditionally, fraud and InfoSec teams often operated independently, with minimal communication. Siloed departments lead to gaps in coverage and slower response times. This new approach emphasizes cross-functional collaboration, ensuring that both teams work together seamlessly to address threats. Effective steps to implement this approach include:
- Collaborative Framework: Establish a framework that encourages regular communication and collaboration between infosec and fraud teams. Joint meetings can help share insights and strategies for tackling emerging threats.
- Unified Threat Intelligence: Combine threat intelligence from both teams to create a comprehensive view of potential risks. This unified approach ensures no threat goes unnoticed.
- Integrated Systems: Implement integrated systems that allow both teams to access and analyze data seamlessly. This integration enhances the ability to detect and respond to threats quickly.
In addition to this new approach, credit unions can leverage advanced technologies to detect suspicious patterns and anomalies before money ever leaves accounts. Machine learning algorithms can analyze vast amounts of data in real-time, identifying potential fraud before it occurs. Another important aspect of fraud prevention is employee training and awareness. Conduct regular training sessions on fraud detection and prevention. Ensure employees are aware of the latest fraud tactics and know how to respond to suspicious activities. Finally, implement robust, “Know your Customer” procedures where member information is regularly updated and validated. These measures assist in detection early on, before the damage is done. Although combating fraud might sometimes appear like a losing battle, a proactive, comprehensive strategy can lead to success.
The role of cybersecurity cannot be overstated, as it forms the backbone of any effective fraud prevention strategy. As the fraud landscape continues to evolve, staying informed and proactive is key to safeguarding your credit union and your members.
Combining advanced technology, a well-trained human firewall, and the integration of infosec and fraud teams creates a powerful fraud-fighting solution. By adopting this comprehensive approach, credit unions can stay ahead of evolving threats, protect their financial health, and maintain the trust and confidence of their members.
Rodney Hood is a former NCUA chairman. He joined the board in 2019, and was named chairman, a post he held until January of 2021. Mr. Hood also previously served on the NCUA board from 2005-2009.