By Ray Birch
ST. PETERSBURG, Fla.—Credit unions across the country have seen a sharp increase in members calling to dispute card transactions, and much of that is due to fraud, according to Velera, which is recommending credit unions markedly improve how they educate and draw members into the fraud fight.
“Over the last couple years we’ve seen a tremendous spike in card disputes,” said Velera COO Dean Michaels. “A dispute is the activity of resolving a disagreement I have with a merchant. It could involve fraud and it might not. But our data show 60% to 65% of our disputes are driven by fraud. Fraud is really driving the increase in disputes.”
In 2023, consumers disputed about 105 million charges with credit-card issuers in the U.S., worth an estimated $11 billion. That is up from $7.2 billion in 2019, according to Datos Insights, a finance-industry research firm, the Wall Street Journal reported, noting the company is predicting that figure will rise nearly 40% by 2026.
Michaels pointed to different reasons for both kinds of fraud incidents rising.
Non-fraud disputes are when card members have a disagreement with the merchant, Michaels reminded.
“For example, you buy a pair of sneakers and then you are not happy with them, or you think something is wrong with the purchase,” he said.
Growing Purchases, Growing Dissatisfaction
Michaels noted that as ecommerce has grown, so, too, has the likelihood a consumer will not be happy with their purchase.
“If I'm buying sneakers in the store, I'm trying the sneakers on and I know they fit. I can see the exact color, so, you are much less likely to end up trying to return those in a couple days,” he said. “Whereas, if you're buying them online there's more risk that they're not going fit, the color might not be exactly what you wanted, and that can lead to a dispute with the merchant if the store says you can’t return the item for certain reasons. Then you have fraud disputes, and we've seen these grow even more. Over the course of the last four or five years we've seen an aggregate number of fraud and non-fraud disputes increase three-fold.”
Credit union card portfolios have also grown during that time by as much as 50%, Michaels said.
“Members are just spending more. Meanwhile we're seeing about a threefold increase in fraud,” he said.
Educating Members
What does this bode for credit unions?
Dean Michaels
“We've seen an uptick in fraud and fraud attempts, and much of this is revolving around scams,” Michaels continued. “Credit unions need to educate members as much as possible about scams and fraud. This is where the fraudsters are compromising the member to give up information that's going to enable fraud.”
However, credit unions could educate members around scams, he said, noting the best way to do that is not by telling staff simply to not fall for scams, but instead to provide real-life examples.”
But that comes with a catch.
“Because, just telling them to be on the lookout for scams is not enough,” he said. “Inside Velera, we get tested on a monthly basis with fake emails that our own info security team is sending to test and train us to be aware of scams. So, the credit union should think about how it can educate members in a in a similar way. I am not saying go as far as to send them fake phishing emails; that would likely annoy most members. Instead, just be very descriptive in terms of what current scams are looking like, and what a common scam might look like. Here's the things you know you need to look out for.”
A ’Surprising’ Increase
Michaels noted that Velera is also seeing a “surprising” increase in the amount of first-party fraud.
“Of course, this leads to more card disputes,” Michaels said. “This is where either the member or somebody associated with the member is committing the fraud. Credit unions are reporting anywhere from 30% to 70% of the fraud being first-party fraud, which is really alarming.”
Long-Term COVID Effects
Michaels said Velera has seen that type of fraud spike during and after the pandemic.
“COVID changed a lot of things,” he said. “I don't know if some of it is a psychological change, where folks feel more comfortable about getting away with something. During COVID folks had a lot of free time on their hands, people were out of work. Idle time is the devil's workshop.”
Michaels believes all of that has led to an increase in the number of amateur fraudsters.
“Credit unions need to develop policies around how are they going to handle this,” he said. “It's difficult enough when you’ve got fraud coming from real bad guys and you want to help your members. But when you suspect the fraud is coming from the member, it can be more difficult to address.”
Moderation Expected
Michaels does not believe the card dispute trend line can continue.
“I do expect it to moderate, he said. “Velera is investing more than $20 million over the course of the next few years in our Linked Analysis environment so we can extend how we use technology, including AI machine learning, to fight fraud. We've been challenged to keep up with just the sheer increase in the volume of disputes, so, we're also in the process of improving tools, redesigning some elements of our disputes operations…This way we could really work through all this this incredible influx and disputes.”