Open Banking and supportive legislation in the form of PSD2 in the EU, and the Open Banking Standard in the UK, is bringing more competition and innovation to financial services than ever before.
With the potential to positively transform how banks and financial services firms tailor their offerings to suit customer needs and wants, to the way that these customers manage their money, Open Banking is here to stay.
Fraud risk
However, it can also present new challenges for the industry. Where volumes of digital payments are increasing and transactions are being processed in seconds, fraudsters are finding new and creative ways to target customers.
While convenient, in this environment, banks and other financial services firms must also ensure they are offering their customers protection from fraud risks.
One area of fraud that presents a very real and increasing threat to the UK payment service landscape is authorised push payment (APP) scams. APP fraud happens when criminals deceive a payment service provider’s customer, be that business or personal, into sending a payment under false pretences to a bank account they control.
According to the Payment Systems Regulator, 79% of APP scams occur on Faster Payments. This statistic matters, because real-time payments are core to the adoption of Open Banking, the future of payments innovation and development of the UK economy.
Demand is high
In April 2021, Faster Payments processed 278.2 million transactions, a 38% increase on the amount processed in April 2020. But unless APP fraud is brought under control, real-time payments in the UK will be under threat, compromising the potential of Open Banking and the customer experience with it.
Any customer of a firm signed up to the Contingent Reimbursement Model Code (CRM Code) – which includes many large, established high street banks in the UK – that fall victim to an APP scam through no fault of their own, should expect to be reimbursed in full. But they should also expect that they will be protected against APP scams in the first place.
The effects of scams are not merely financial. Reimbursement, while vital to reversing financial distress caused by APP scams, cannot reverse the emotional distress caused, with the victim’s experience so often associated with feelings of guilt, shame, worry, and embarrassment.
By preventing APP scams from happening in the first place, we can reduce the number of customers that have to go through this ordeal and allow Open Banking to reach its full potential.
This is not to understate the importance of reimbursement and the appropriate aftercare. Both are crucial steps to ensuring victims are, and continue to be, protected against APP fraud, no matter how large or small the amount lost as a result of the scam.
What if every reimbursement case was understood as a missed opportunity for prevention? What if the industry placed as much onus on the prevention of APP scams as it currently does on reimbursement? What if calls for reimbursement data to be published were met with the same demand for access to prevention data?
I imagine we would be living in a world of more choice, healthy competition and, importantly, even more scope for Open Banking and Faster Payments to thrive.
Warning system
So how can we move the prevention of APP fraud up the agenda?
In a digitally-driven environment, a key focus area for preventing customers falling victim to APP scams is the implementation of effective warnings.
A recent review by the Lending Standards Board indicates that an effective warning is one that is dynamic and tailored to the customer’s payment journey, and when implemented in tandem with other prevention measures outlined by the CRM Code, can be successful in reducing APP scams.
Further, recent research from the Open Banking Implementation Entity suggests that implementing small changes to warnings across banking apps, using a combination of call-to-action and risk-based warnings over time, can have the potential to drastically reduce the number of individuals that fall victim to APP fraud.
In the fight to protect customers against APP fraud, scams could also be significantly reduced with a collective effort across the industry and beyond. Whether that’s banks, non-traditional lenders and PSPs raising awareness to educate their customers on the signs and risks of APP scams, or working with industry to increase signatories to the CRM Code to ensure good customer outcomes.
Beyond this, online forums, social media platforms, and influential voices also have a role to play in raising awareness of and preventing scams. Customers can also help by being vigilant and reading and acting upon warnings and information presented to them.
Reimbursement, although critical, should be the last resort when it comes to protecting customers from APP fraud. Prevention, detection, and awareness measures must move up the agenda for banks, non-traditional lenders, PSPs, and customers alike to ensure that the customer is protected at every possible stage of the payment journey, and that Open Banking has the power to reach its full potential.
Emma Lovell is chief executive of the Lending Standards Board
