Insight: Clamping down on APP fraud is a balancing act

Robert Sullivan,
08 Dec 2022

On 25 November, the Payment Systems Regulator’s (PSR’s) consultation on new proposals to help address Authorised Push Payment (APP) scams closed.

APP fraud scams have a terrible and lasting impact on their victims who are, more often than not, consumers.

Without doubt, there is an urgent need to adopt a cross-sectoral approach to protect consumers and reduce harm from APP scams in the future.

In its consultation, the PSR has proposed requiring reimbursement for scam victims and splitting the funding of reimbursement 50/50 between the sending bank and the recipient bank. The PSR’s thinking is that it would place more incentives on both the sending and receiving bank to stop APP scams. The PSR has stated that payments initiated via Open Banking would be included in these proposals.

However, alongside its work on APP scams, the PSR also has a policy programme aimed at driving Open Banking-enabled account-to-account (A2A) payments to compete with cards for retail payment use cases.

We are concerned that there is a fundamental tension between the PSR’s ambitions for A2A retail payments and the PSR’s latest proposals to address APP scams.

Unintended consequences

For Open Banking A2A retail payments to effectively compete with cards, it is key that the underlying A2A payments are fast, low friction and low cost. Unfortunately, the PSR’s APP scam proposals have the potential to adversely impact all these characteristics for Open Banking-enabled A2A payments. Further, this is unlikely to be for any material benefit, given that Open Banking-enabled A2A payments to merchants are already at significantly lower risk of APP scams.

Our first issue is with friction. The PSR’s proposals will likely result in banks introducing more warning screens and steps to A2A payment consent and authentication journeys, thereby adding more friction to the use of A2A for retail payments.

More broadly, there is the risk of banks slowing down payments as a result of these proposals – for example, by introducing a lower threshold for payments that are escalated for enhanced fraud checks.

While more friction and slower speed may be an appropriate response for A2A payments at genuinely higher risk of APP scams, it is not appropriate for Open Banking A2A retail payments to merchants. For these payments, merchants partner with a payments provider to immutably pre-populate the merchant’s payment account details for the consumer. This means the consumer is unable to be convinced to change these details by an APP scammer.

Further, a merchant using Open Banking A2A payments is also at lower risk of being an APP scammer, given the merchant is subject to additional due diligence by their Open Banking payments partner (on top of the vetting done by the merchant’s own bank).

Lastly, we also believe broader liability for reimbursement will impact the economics of instant payments for banks. As it stands in the UK, instant payments are typically free to consumers on the send side, and businesses pay to receive them. To claw back some of what they would spend on victim reimbursements, banks may pass on higher costs to businesses. This will clearly have an impact on a business’s decision about whether to accept retail transactions using cards or Open Banking.

What we’d like to see the PSR do

Before it proceeds to implementation, we encourage the PSR to consider in more detail the potential impact of its APP scam proposals on the ability of Open Banking-enabled A2A payments to effectively compete as a retail payment method.

In parallel, we think the PSR should support the Open Banking ecosystem to enable richer sharing of data between Open Banking providers and banks. This will help support banks in making more targeted and informed decisions around the risk of a specific A2A payment to APP scams.

Further, industry-level data around fraud and Open Banking payments is currently extremely limited. It would be beneficial for regulators and the industry to collect more data on the specific types of fraud happening around Open Banking payments.

If provided with the environment to flourish, Open Banking-enabled A2A retail payments can help address the issue of APP scams. Let’s work together on tackling APP fraud for the benefit of consumers and merchants.

Robert Sullivan is public policy and strategy director at Token