Despite reports of an uptick in fraud related to Apple Pay, credit unions are still rushing to add the service, chalking up the latest string of financial fraud tied to Apple Pay as the price for early adoption.
"To date, our fraud exposure has not been as high as some reported recently in the media," said Partners Federal Credit Union Chief Marketing Officer Mike Terzian.
Late last year, the Burbank, Calif.-based credit union rolled out Apple Pay to its 113,400 members. Currently, the $1.2 billion CU has 3,400 credit and debit cards successfully enrolled in Apple Pay, which equates to 2,200 of its more than 100,000 members leveraging the service.
"Adoption rates are difficult to pinpoint as approximately 50% of the membership use an iPhone or iPad, however many have not upgraded to the iPhone 6," said Terzian. "The approach [to fraud] remains multiple lines of protection from our members' awareness to our service representative's vigilance to our third parties' fraud protection tools."
In certain respects, Apple Pay has opened a new door for crooks — and one that may be easier to unlock, according to some.
Industry analysts purport it is relatively easy to upload stolen credit cards, Card Verification Value (CVV) or iTunes accounts on an iPhone 6 or 6 Plus and make a fraudulent purchase. This data sells on the black market for anywhere from $1 to $8 per account.
According to Apple Inc., the company carefully authenticates customers every time a purchase is made. Additionally, Apple offers tools that identify the device name and current geographic location.
An Apple spokesperson told CNNMoney last month that Apple Pay "Requires banks to verify each and every card," adding that "The bank then determines and approves whether a card can be added to Apple Pay."
Indeed the issue of providing tokens for purchase to a member's iPhone is not an Apple Pay process, explained Jack Henry & Associates General Manager Payment Processing Solutions John Postle. Rather, the tokens are awarded from Visa and MasterCard. Apple Pay is merely the conduit.
A member has to verify a new credit card with the last four digits of his or her Social Security Number or another security measure such as Interactive Voice Response (IVR). When a retailer sends the request for payment, the Apple Pay tokens are transferred from participating credit and debit card issuers. But this security measure isn't built into Apple Pay itself.
"The token is provisioned by Visa or Master Card. The request goes there first. They each have rules-based risk evaluations within token service and it either passes or it doesn't," said Postle adding that these evaluations are color-coded by severity: green, yellow and red.
Michelle Thornton, director, Product Development for the Cucamonga, Calif.-based CO-OP Financial Services, explained that credit unions can take proactive measures to combat these latest fraudulent attempts. "Most fraud occurs when a member's authentication protocols have not been properly set up."
CO-OP currently has 12 credit unions clients live with Apple Pay and expect to have more than 30 live by the end of April and roughly 75 by the end of June. "We are not aware of any credit unions and their members being impacted by Apple Pay-related fraud," said Thornton.
"Authentication IDs and passwords need to be employed that fraudsters cannot figure out — at least not easily," said Thornton. "This can include things that the fraudster would not know, such as the last transaction date or the last six numbers — as opposed to the last four — of the member's Social Security Number."
A Growing Credit Union Crop
Partners FCU is among 100 credit unions currently offering Apple Pay. Countless CUs are in the application processing queue waiting for Apple's greenlight. And despite fraud alerts, 15 to 20 financial institutions happily join the field every two weeks.
"While we have seen the articles and heard the reports of fraud with Apple Pay, we haven't had any reports among our customers," said Postle who added that Apple Pay CU clients' transactions are monitored and protected. "But, of course it is in the early adopter stage."
Navy Federal Credit Union, the first CU to roll out Apple Pay to its members and one of the first financial institutions to do so overall, is the ultimate early adopter. Navy Fed Assistant Vice President of eChannels Meghan Gound wouldn't say if the credit union has experienced Apple Pay fraud.
"While we don't discuss fraud levels for any of our products publicly, we can share that Navy Federal puts a strong focus on fraud prevention for our members," said Gound. "Apple Pay is no different: from its initial launch, we have had stringent procedures in place for card provisioning."
First debuting Apple Pay in November 2014, Navy Federal also wouldn't disclose how many of its 5.3 million members are currently using Apple Pay.
"We can tell you that of our members who are iPhone users, about 40% use the iPhone 6 or iPhone 6 Plus, which support Apple Pay," said Gound. "Our members are early adopters of new technology and there has been steady adoption since we launched with Apple Pay."
Jack Henry, and its subsidiary Symitar, currently have 12 credit union clients that have rolled out Apple Pay, and more than 100 CU clients are in Apple's queue. Symitar's CEO Ted Bilke said how long a credit union stays in Apple's queue depends on a host of variables, such as the switch/network provider and adherence to regulatory compliance. As result, the process can take as little as two weeks or as many as six months.
Most often, Bilke said CUs can expect six to eight weeks as the average go-to-market time frame. And while fraud remains a concern, he noted that CUs are eager to offer the service to respective membership.
"At our advisory board meeting last December, we had 16 of our largest customers there — all were in the process of implementing Apple Pay," said Bilke. "Credit unions are aggressively moving to offer Apple Pay.
Among Jack Henry clients are Partners FCU and the Chicago-based Alliant Credit Union supporting 285,000 members. The latter rolled out the service in February. As of mid-March, 1,198 Alliant CU members have provisioned their Alliant cards in Apple Pay, according to Alliant CU Senior Vice President of Operations and Technology George Rudolph.
"We've yet to receive one single complaint about Apple Pay," said Rudolph. "There's a lot of buzz, and it is all good buzz."
Rudolph added that the adoption rate, representing fewer than 1% of membership, has been slower than expected, though an accelerated adoption rate is predicted as the iPhone 6 and 6 Plus become more mainstream.
"Going into this venture, we were well aware that new product offerings present new fraud risks," said Rudolph. "Alliant diligently authenticates our members, and while it may sometimes be inconvenient, protecting the information and assets our members have entrusted to us is, and must continue to be, our No. 1 priority."
Partners FCU Terzian said that as more members move through the normal iPhone replacement cycle, a steady and consistent demand for the service is expected. The industry tipping point, he noted, will be driven by the merchants and their ability to process not only Apple Pay, but the next version of Google Wallet and Samsung Pay.
"Our goal is to remain relevant among the various payment needs and wants of our diverse membership and to say yes to as many services and capabilities that our memberships request in a secure and sustainable manner," he said.
As more financial transactions are conducted via smart phones, fraud attempts will likely increase, which has long been a reality with all technological advancements. But thwarting fraud, as always, is the cost of doing business.
"Our risk management team monitors both our portfolio as well as market trends on a daily basis," said Terzian. "There is no one silver bullet to combat fraud."
With regard to credit union Apple Pay adoption rates moving forward, Thornton said CO-OP is taking a wait-and-see approach.
"The recent fraud reports may impact implementation in the short term, but I think when we look back on this a year from now, it will not affect implementation greatly," said Thornton. "Apple Pay has definitely provided a spark to the adoption of mobile payments and Apple Pay will be used as much as any other product."