Guard Against Debit Card Fraud

Preston Faykus

The pervasive use of debit cards is encouraging criminals to invent new ways to steal from credit unions and their members.

Debit card fraud no longer is strictly the result of lost or stolen cards. Today’s thieves are more sophisticated. Areas of rising debit card fraud include compromising cards by skimming or counterfeiting, stealing cards out of the mail, and account takeovers using false identities. As advanced equipment becomes cheaper and more accessible to fraudsters, credit unions find themselves attacked from all fronts—making advanced, proactive fraud prevention programs critical.

Measuring PIN-based risk

Contrary to popular belief, personal identification number (PIN)-based transactions aren’t immune to fraud. The most common methods of PIN-based fraud involve bogus automated teller machine (ATM) or point-of-sale terminals using skimming devices, remote cameras, or keyboard overlays to record cardholder PINs. In most cases, cardholders aren’t aware their card data have been compromised.

Effective fraud prevention programs evaluate both signature- and PIN-based transactions in real time. Tracking PIN-based transactions offers the added benefit of identifying the specific geographic location of individual cards at the time of the transaction, helping institutions recognize fraudulent transactions in geographically diverse locations.

For example, if a cardholder makes a PIN-based transaction at a gas station in Florida and a fraudster tries to conduct a signature-based transaction to purchase stereo equipment in Chicago within the hour, the geographic discrepancies set off an alert that a fraudulent transaction likely is in progress.

Effective fraud prevention programs can reduce fraud levels from an average of seven basis points (bp) to five bp or lower (i.e., $.05 per $100 of purchase volume or less). These programs integrate both core processing and electronic funds transfer (EFT) platforms with secure card activation channels, rules-based fraud prevention systems, and sophisticated neural networks—all leveraged by trained fraud analysts. This integrated approach delivers timely, synchronized data that can help credit unions mitigate the evolving nature of debit card risk.

Other ways to combat debit card fraud include:

• Card activation: incorporating secure channels. Card activation remains an important method to track newly issued cards. The use of audit mailers and convenient, yet highly secure, card activation channels—ATM, telephone, Internet banking—are essential components of a comprehensive fraud prevention solution. By requiring cardholders to enter personal user information, financial institutions can mitigate potential fraud by ensuring cardholders did indeed receive their cards before processing transactions.

• Rules-based programs: flagging fraud types. Rules-based systems evaluate current transaction patterns against typical fraud patterns to determine if a transaction is fraudulent. The rules can address specific types of fraud identified by geographic regions, financial institutions, or merchant types. Rules also protect cardholders with limited transaction history because the rules identify fraudulent spending patterns. The key to developing a successful rules-based program is developing effective rules without adding superfluous parameters that slow the evaluation process.

• Neural networks: tracking cardholder behavior. The strength of a neural network lies in pattern recognition and classification and in prediction and control of complex data patterns. These sophisticated solutions store thousands of examples of valid purchase transactions and constantly update individual cardholder data so future purchases can be evaluated against the cardholders’ most current profile. In fact, a neural network is designed to "learn," updating itself like a human brain.

  Each time an authorization request is processed, the transaction is evaluated against the individual’s debit card transaction history. The network analyzes the potential risk of fraud and produces a score. If the score exceeds one of the predefined thresholds, an alert is generated and is sent to an experienced fraud analyst for further investigation. Parameters typically used in neural networks include long-term purchase behavior, frequency of purchases, types of merchants cardholders visit regularly, distance from home, and even the cardholders’ most typical shopping days and times.

• Fraud analysts: the human touch. Cardholders rarely fall into perfect spending patterns, so it’s important to incorporate the "human factor" for effective resolution of suspicious transactions. When a neural network generates an alert for suspicious transactions, fraud analysts can investigate whether they’re fraudulent.

  Because both analytical and interviewing skills are necessary to effectively maintain a low level of fraud without bombarding cardholders with constant checks, most effective fraud-prevention initiatives will tightly integrate the fraud analysis and cardholder contact functions. Fraud experts also play a critical role in incorporating new rules and parameters into fraud prevention systems to mitigate loss from future incidents.

• Proactive resolution. Integrating a process for initiating chargebacks once fraudulent transactions are confirmed could streamline administration work while expediting the process of obtaining the funds due to the credit union. One group should control the chargeback function so all disputed items can be properly tracked and managed.

The bottom line: In today’s competitive market, debit cards are an essential retail product. Credit unions are well advised to take a proactive approach to fraud prevention. Implement integrated fraud prevention solutions to protect you and your members.

Preston Faykus has a diverse international banking career that spans four continents and more than a decade in product development, market strategy, and retail banking. He currently serves as eBanking product manager for Aurum Technology, Plano, Texas, leading the company’s ATM and EFT lines of business. Call 877-AURUM (482-8786).