Reducing the risk of fraud: A necessary evolution in payments

When it comes to the payments industry, new and upcoming fintech solutions mean there are new ways for cybercriminals to try and defraud anyone with a dollar to their name. For as long as money has existed, thieves have been trying to steal it – and the digital era of payments and banking is no different. As we enter 2023, credit unions must consider several payment fraud risks as they inherently prepare for and respond to these differently than larger financial institutions.

Risk #1: Look no further than your phone

As digitization trends continue to grow stronger, we’ll see an increase in mobile card non-present payments – led by popular apps such as Apple Wallet and Google Pay. Fraud risk in this area has really taken off in the past decade, as smartphones and mobile apps caused a rise in scam calls, texts, etc. What was once a generally “safe” device is now a central element of daily life, with most of us spending every waking moment using it. We don’t just have all our social media apps on our phones but also store all our credit/debit cards, addresses, email accounts and even driver’s license in one place. In other words, it’s a centerpiece for a thief to gain access to your bank account and more.

As with many things, the way consumers and businesses exchange money has changed drastically in the past few years. The onset of the COVID-19 pandemic forced industries and the businesses within them to fully embrace digitization, threatening to leave those who couldn’t transform behind their competitors. With this, digital transactions have reached an all-time high, and so has payment fraud. The rise in online shopping, contactless pickup, and delivery apps, means that nearly everyone is engaging in online transactions, increasing their threat level for payment fraud.

Risk #2: What you do online matters

A symptom of smartphones and increased digital transactions is that members have a higher digital presence than ever before, which means more of their data ends up online than they realize. Data breaches are becoming more harmful as they compromise both the information stored by a breached business as well as that of any connected apps or partner data. Because our mobile devices feel like such an extension of ourselves, we don’t think twice about our private data stored on them, which otherwise we’d protect with much more care.

Think about how many places you have your credit or debit card saved for simple “Buy Now” payments. It’s the equivalent of leaving your credit card on the counter of a store. Because this level of digitization is brand new, we don’t have tried and safe member habits in place. Instead, members lean only on the convenience of digital payments, and don’t realize how vulnerable they’ve left themselves. It’s not just personal data we’re adding without a second thought. It’s financial data as well.

Risk #3: The human error factor

As a foundational approach to these new problems, credit union executives should remain hyper-aware of the pace of digitization. They should also remain aware of the evolution of tools and training that pair with that digitization. If an organization lets a new fraud prevention tool slip their notice, it could expose them to an entire sector of fraud.

Without proper training, employees might even miss fraud attempts when they’re right in front of them. This training gap is widening, particularly in credit unions that rely on third party resources that larger financial institutions don’t have to. That said, the training issue is perhaps more important than the tool issue. If an organization cannot afford the appropriate tools to combat fraud, they must make it a priority to at least be able to afford the necessary training.

Steps to take in 2023

With all these new and emerging risks, credit unions may find themselves more vulnerable than other institutions for several key reasons, including less budget to spend on protections than major financial organizations, fewer overall resources and a heightened risk of reputational damage. This is not to say that credit unions are at a disadvantage when, in fact, they have a myriad of opportunities available to them and can often stay ahead of the pack as a smaller, nimbler organization.

Credit unions can begin with readily available tools capable of preventing major issues. For example, authentication tools are part of most, if not all, financial organizations. The trick is to place them correctly and to make them a non-negotiable part of the member onboarding process. Members want immediacy and convenience, so it may seem counter-intuitive to include an authentication process as part of an onboarding process. However, members inevitably prefer to complete these steps upfront rather than follow a more complicated and disruptive setup in the future (or worse, become a victim of a cyberattack).

Solutions enhanced with behavioral artificial intelligence can also be a wise investment, as it will become familiar with a member’s monetary habits over time, sending immediate warning alerts when an anomaly appears. This allows a credit union to be always on top of their member’s needs.

At the end of the day, protecting your members is protecting your credit union. Small credit unions may not have all the tools and resources a financial giant might, but with the right training and selection of key tools, they can start at the root of the problem to prevent it from becoming a giant issue later. Credit unions can’t afford reputational damage from not protecting their members in the way large financial institutions may be able to. The same reputational damage that could lead to a bad quarter for a large institution could be the end for a credit union. Growth is never easy, but it’s necessary.