Courage Needed - Stopping Fraud

Helping Those Who Refuse To Be Helped

How do you help someone who refuses to help themselves? That is a million dollar question for many community based financial institutions. It can be maddening and can feel like you are chasing your own tail.

The best way to help someone is to have the courage to talk to them about the choice on the table. That of course is the one thing that many financial institutions are reluctant to do. That reluctance enables criminals and “cyber sirens” to steal hundreds of millions of dollars from our member owners each year.

For each of us and our members scarcely an hour of the day goes by in that we are called upon to make choices of one sort or another. Some are trivial, some are more far-reaching. Some will make no difference in the grand scheme of things, and others can make a grave difference.

Categories of Choice

A man I admire once shared his perspective on choice in this way, “As I’ve contemplated the various aspects of choice, I’ve put them into three categories: first, the right of choice; second, the responsibility of choice; and third, the results of choice. I call these the three Rs of choice.” This perspective shares critical elements that play a key part in any financial cooperative.

Consider the first element that of choice. Our financial institutions are financially owned by our members and many members take great pride in this fact. On more than one occasion I have had an older member, who has escalated to me for some reason, remind me, “That you work for me. I am an owner of this credit union.”

However, this pride of ownership can change for members when you consider the responsibility of choice. For some members the concept of who is responsible for choices made becomes a line in the dirt that when crossed takes you from being “their” financial institution to “that” financial institution. The view of "being all things to all people" can be frustrating and dangerous if not kept in check.For example, a member complains about a policy that prevents fraud and suddenly you find everyone is second guessing the policy. You can’t allow the vocal minority to become the voice of a silent but content majority. Too often it is the vocal member who sends one email to the board or the CEO who suddenly has everyone scrambling to change policy or rework critical processes.

This danger becomes more critical when the member has no real perspective on the complexity of the issue they are weighing in on. Take card fraud prevention strategies as a topic. For most members they want to use their card wherever and however they feel best. From their perspective it is none of your business how they use the card. I can completely understand that perspective as that was the one I had until my own card information was compromised. When I asked how this could happen I suddenly found out just how much I didn't know about card fraud or online fraud. I simply knew how to use the card without any knowledge or understanding of how to protect the usage of my card. 


Recently in doing some research on card fraud prevention strategies I came across a warning from the FBI. In a May 21 memo, the FBI issued a warning to hotel guests. The caution was prompted by fraudsters who are using hotel Internet connections to target travelers. What’s their hook? Old fashioned malware.

The fraudsters use a pop-up window to trick travelers into installing “software updates” on their computers. The updates are actually malware that allows the fraudsters access to a hotel guest’s personal computer and data, such as online banking credentials.

Think about the member who is unaware of the warning mentioned above going on vacation and using the amenities at their hotel. To them nothing seems amiss. Fast forward one week later and the member calls in because they have noticed that there are fraudulent charges on their card or a wire has been authorized from their personal line of credit. The burden of responsibility has shifted and they wonder why they were not protected from the choices that they had made.

This game of choice and consequence plays out in various forms. I have listened to a branch manager relate how a member fell for an online dating scam in which they send their “new love” a money wire because they needed travel funds. Then the truth is revealed as the love interest disappears and the member realizes they have been conned by a “cyber siren”. Sadly, they then realize that they now own the responsibility of the loss. For the member the realization that the result of their choice has made them wiser but financially poorer is not of much comfort.

The Forth Category of Choice is Courage.

It takes managerial courage to decline a potentially fraudulent card transaction. It takes courage for a teller to ask the member where they received the funds for their new “work from home” job. It takes courage to ask if there is a “special reason” for the new large wire transfer. It takes courage to ask members to call you prior to traveling outside of their normal spending areas. All of these actions take courage. They fall to the institution to adopt and educate the membership on. 


The Federal Trade Commission estimates that 10 million people a year are victimized by credit card theft costing close to 50 billion dollars per year for card related losses. The tools we have available are impressive: common points of purchase analysis, advanced authorization scoring, Fair Isaac FALCON scoring of transactions, flash fraud rules across the network. Yet, the most powerful tool we have is in engaging is our members and educating them so that they work with the institution and not against the institution.

Most members will adapt and will be glad that someone spoke up and tried to help them with the choices that they are asked to make each day. We are the professionals. We bear the responsibility to educate members on the tactics that criminals and “cyber sirens” use. If we fail to exercise the various aspects of choice; the courage of choice, our right of choice, our responsibility of choice; then we can’t be upset at our members for the results of choice.

Practical Application

• Does your front line staff ask courageous questions to help protect your members ?
• Do you post on Facebook or your website fraud warnings or travel tips to prevent fraud ?
• Do you use real time fraud scoring to protect the credit union from fraud losses ? 
• Do you have real operational goals around fraud losses including run rates and bench marks ?
• Do you run predictive analysis to understand fraud trends and the cost to your membership?

Credit Union Branch Strategy- What Strategy ??

You can almost picture our tiny blog huddled around the circle of the other amateur blogs in the monthly blogging support group, “Hello…my name is Credit Union MBA and up to this point I have gone seven months without writing a blog. Today I fell off the wagon. Not just any wagon mind you. No, I fell off the wagon writing a blog about…the future of the branch. I know…I am not proud of it.”

 I mean we have all read dozens of blog entries this year on the Future of the Branch. I myself have yawned through a few of them. However, a few of them resonated with me. I felt the old addiction start to call to me. Maybe this is the year when financial institutions will have a real conversation about channel strategy?  Could this really be the year that the digital channels will finally move from the proverbial “kids table” and join the other channels around the board room table? The tipping point in executives pondering channel strategy suggest that this might indeed be the year. 

A Channel Strategy - I Don't Need No Stinking Channel Strategy

Earlier this year I have attended a few conferences and had the privilege of sitting at the table with the executives from some of the nation’s largest national banks, regional banks, community banks and credit unions. The good news for all of us in community based financial institutions is that no one and I mean no one has this channel migration figured out. My observations of the various institutions are listed below:

•  Not one person at the table could clearly articulate their institutions overall channel strategy (possible exception was a national Canadian Bank).
• Each of the participants were actively trying to play catch up and understand what exactly they needed to do with branches and staff they had invested so much time and resources into.
•   Many of the participants discussed the challenge of trying to coordinate and allocate capital or resources across the channel spectrum.  Many admitted that the channels do not coordinate with each other when it came to resource or capital allocation. An all too common theme was that branches will look to create new branches, call center does its own thing, and digital channels look to expand. This approach is built upon channel champions advocating independently and thus no real cross-channel strategic prioritization happens within the organizations.
• The group consensus was that closing branches across the board was not feasible. This approach was too disruptive to local communities, and to internal cultures. It also did away with the talent that had been invested via training, coaching, and mentoring to the branch staff.

 So what are the brutal facts we in the credit union world need to acknowledge as we try and come up with our full spectrum channel strategy? The brutal facts are that the world around our branches has changed. Specifically two real challenges to the traditional branch channel strategy are the migration of transaction volume and the change in the service fee environment. These changes put at risk a model that has heavy occupancy cost and staffing costs that has been allowed to flourish because it was able to float on top of the rising tide of service fees. That tide has changed.

Transactions are Migrating across Channels

Distribution channels have continued to spawn and grow since the advent of the ATM. Today branch network competes with the IVR, call center, online, and mobile and now social networks channels are immerging.  The trend for financial institutions has been to try and blur the lines of distinction between the various channels. I myself have been a proponent of the channel agnostic approach in the past. I have come to realize though that this type of approach has a fundamental flaw in it. The flaw is that you no longer proactively create your channel strategy.  When all channels are equal in the eyes of your members then you place your channel strategy in the hands of the group of people who are not even concerned with a channel strategy- your members.  

“When you have a loss of distinction between the various channels value propositions then the member creates the channel strategy for the financial institution. This can be seen as transaction volumes continue to migrate.”

So let’s consider some fundamental changes to the environment that are impacting channel strategy. The first is that branch traffic (counting new account opening) are projected to decline by 3 percent per year through the middle of the decade.

2010 -14.9 billion transactions

2012-13.54 billion transactions

2014 - 12.71 billion transactions

Online and mobile transactions are expected to grow rapidly, becoming the primary transaction channels within 2-3 years.

2010 - 28.5 billion transactions for online

2012- 30.8 billion transactions for online

2013 - 32.1 billion transactions for online

2010 - 5 billion transactions for mobile

2012 - 6.4 billion transactions for mobile

2013 -10.5 billion transactions for mobile

The United States faces a prolonged environment of stagnate retail lending growth. This is compounded by fee income that, in the past, was considered stable and is now being targeted and eliminated with new regulations.  Consider the following: Service Charges on Deposit Accounts, 

FDIC Institutions

2009 - 41.7 billion in service charges

2010 - 36.2 billion in service charges

2011 - 34.1 billion in service charges

Changing Consumer Behaviors 

All deep drivers of consumer behavior point to one direction - lower use of physical channels (branch and call center). The accepted assumptions about the consumer view of convenience and trust/safety that underpin the current branch strategy are in play. This has downstream impact as the branch networks become expense areas of focus as for the past decade it has been non-interest income (fees) that have funded and sustained the operational expense of the branch network.

Any decline in service income will open a gap in branch occupancy expense coverage.  You can expect uncovered branch network expenses to appear and grow rapidly. This will be a mind-shift for channel leaders who have grown and matured as channel leaders over the past decade in a service fee environment that is now eroding.

The environment ahead is very different than what many of these leaders have built their experience upon as the existing banking model no longer generates sufficient returns. Added to that, many of these leaders are not as familiar with non-physical channels and, therefore, are not sure what direction they need to take. 

"McKinsey estimates that without substantial business model changes financial institution ROE will fall below the cost of capital."

The way forward is a combination of innovation (pricing strategies and target segmentation for product development) and cost management initiatives. Every financial institution will have to embrace digital channels to protect ROE. 

Questions to Consider:

• How do you create space in the branch for digital channels?
• How do you create a space for the branch in the emerging digital economic intersection your members are now using?
• What are the specific channel value propositions you are educating your members on?
• What external threats are seeking to do the same thing (PayPal, Facebook, BankSimple)?