Reducing Instant Payment Fraud requires transparency, unity and technology

Society and Law has reached a check point where the new digital world is almost beyond the current laws and banking practises. Let’s take a look at fraud in Faster Payments, UK’s instant payment initiative, which is being replicated in over 50 countries, and soon to become available for cross border payments.

Faster payments fraud totalled £330 million in 2019, an annual increase of 30% over 2018. In addition, annual bank investigation costs are estimated at £125 million. This costs the banking industry £9 per year per active bank account. Given the pandemic and the added  acceleration by society to digital, further increase of 30% in 2020 in faster payments fraud seems probable, increasing the cost to active bank accounts to £12 per year. This makes the practice of ‘free bank accounts’ even more challenging. That is if the banks absorb the total fraud cost. At this time, only 41 percent being reimbursed. The majority of fraud write offs remain in limbo causing at least 100,000 banks’ customers significant emotional and financial stress.

Fraudsters use a combination of techniques, on smart phones, including text, email, too good to be true web sites, and telephone calls to create emotional manipulation on the owner of the bank account. Technology enables the fraudsters to operate at large scale, sending thousands of requests to people in Covid isolation; then cold calling to find the vulnerable who are maybe feeling isolated and lonely and applying psychological undermining to get what they want. Their goal is to have the owner of the bank account move money to the fraudsters’ bank account using instant payments. All while working from home. 

Corporate frauds are 30x higher than the average consumer’s loss of £3,600. No wonder the corporations and SMEs are under constant bombardment from fraudsters outside and inside the company.

Fraud is corrosive to society, individuals and businesses and the Government and banks have initiated programmes to help people endeavour to defend themselves against fraud:

• The Take Five Government Campaign encourages bank customers to take make sure they know who they are paying but few people actually check internet T’s and C’s
• Banks that have Confirmation of Payee, (6 out of 32 direct faster payment banks) check payee account name, sort code and account number before giving approval
• Banks  operating under the Voluntary Code (12 banks) have shown little consistency towards the rules with many fraud reimbursement being inappropriately declined.
• Banks themselves provide their own warnings and often request the client to tick accept before moving to the next step. The regulators have noted many bank warnings are vague and ineffective

A patchwork of generic warnings, individual bank defences and a tendency for the bank to be indifferent to the client is ideal for the fraudsters’. They target the areas of least resistance first. 

The point of no return is when the money leaves the account. As one banker noted, “once the money has gone, it’s gone!” Recovery can be measured in very low percentages.

There are two parties involved, the client and the bank. Today, the client prepares the payment off the banking app or payment system, sends to the bank and the bank instantly notes the payment has been arranged.

Prior to the money being moved by the bank (or trusted third party) there needs to be a risk assessment on the payment being a fraud. This needs to take place in seconds. Then the resulting high-level risk transactions are necessary for the client and the bank to agree on next steps before any money leaves the account.

University research has shown that 99.6 percent of frauds can be detected in seconds. That is the £330 million in fraud can be reduced to less than £3 million. In 2014, the Digital Policy Alliance using historical faster payments showed 70 percent of frauds can be identified before the payment, enabling today’s fraud to be reduced to £100 million.

Cybercurrencies are probably more enticing than fiat currencies as they are new to all. The fraudsters are usually the first to adapt to any new form of payment asset class. For example, the Chinese, inventors of paper money, soon noticed counterfeiting was a problem. They added a deterrent and an incentive printed on the bank note: forgers will be decapitated and those given information to the arrest of forgers will be rewarded.

We should address the lack of deterrents against the digital fraudster.  Faster payments are a fundamental change from the historic payment practises. Enforcement needs to focus on where the money is going. Information on the bank account is vital in identifying fraudsters. Better collaboration between the client and bank is needed. It is essential for Banks to work more cohesively as a unit and the authorities have to make this happen. Faster payments originally came from the regulators before society really went digital. Fraudsters have to be stifled and with technology this process can be achieved.