On the same page: mitigating APP fraud

April 2023 | FEATURE | BANKING & FINANCE

Financier Worldwide Magazine

April 2023 Issue

The UK payments industry is expansive and plays a vital role in the country’s economy. It is also a major target for fraudsters, with authorised push payment (APP) scams in particular gaining momentum.

According to UK Finance’s 2022 Fraud Report, in 2021, UK losses to APP scams reached £583.2m – a 39 percent year-on-year increase. In the first half of 2022, £249.1m was lost, although it is likely that the actual losses are higher, as many victims are embarrassed to have been conned and do not report it.

Essentially, APP fraud is attractive to criminals because real-time payments systems, such as the UK Faster Payments Service (FPS), means that once a payment has been sent to an account that is under a fraudster’s control, it can then be laundered through multiple other accounts, making it especially difficult to trace and recover the funds.

“Fraudsters constantly look for the low-hanging fruit and the implementation of strong customer authentication for card transactions has made it more difficult for them to use stolen card credentials to purchase goods and access funds,” says Sarah Rutherford, senior director of portfolio marketing, global, fraud and compliance at FICO. “In an APP fraud, the victim is actually making the payment, so strong customer authentication will not stop the fraud, making it even more attractive to fraudsters.”

Moreover, as the cost-of-living crisis in the UK continues, we are likely to see APP fraud accelerate, with fraudsters finding new ways to defraud via fake emails, websites and social media posts, among other avenues.

Collaborative approach

While the UK payments industry has taken great strides to improve its fraud detection and prevention tactics, this is not an area where the eye can be taken off the ball, with many advocating that the best way to push back at fraudsters is with a considered and collaborative effort, with everyone in the payments ecosystem on the same page.

“More needs to be done across the financial and digital ecosystem to tackle fraud, and it is crucial that everyone plays their part,” contends Claire Simpson, senior policy manager at the Payment Systems Regulator (PSR). “We want people to be better protected if they are targeted by a scammer and our recent proposals aim to provide much greater and consistent levels of protection against APP fraud.

“With the cost to business and society of APP fraud increasing, the UK payments industry is pulling out the stops to prevent these scams from happening and to better protect people if they do fall victim.”

“Under our plans, banks will be required to reimburse the majority of customers who have fallen victim to APP fraud,” she continues. “This is likely to be a significant increase on current reimbursement rates, which are around 56 percent. In line with protections for other payments and financial services, we have consulted on proposals which would see a minimum standard of protection across the board.”

In the view of Eduardo Castro, managing director of identity and fraud at Experian UK&I, to effectively address the escalation of APP fraud, collaboration is key. “With recent changes in liability by the PSR, it being shared between payee and receiver, both parties now have a joint incentive to prevent APP,” he suggests. “Due to its complex nature and the different consumer interaction points involved, there is a need for greater information sharing between various service providers.”

Highlighting the collaborative approach to tackling fraud are two UK Finance-driven initiatives. The ‘Take Five to Stop Fraud’ national campaign, which offers straightforward and impartial advice to help everyone protect themselves from preventable financial fraud. And the ‘Banking Protocol’, an industry scheme that allows branch staff to alert local police to suspected fraud, with an immediate response to the branch. This includes email deception and phone-based scams as well as online fraud – particularly where criminals impersonate trusted organisations.

“Criminals are experts at impersonating people, organisations and the police,” adds Katy Worobec, managing director of economic crime at UK Finance. “They spend hours researching for their scams, hoping businesses will let their guard down for just a moment.”

On the horizon

With the cost to business and society of APP fraud increasing, the UK payments industry is pulling out the stops to prevent these scams from happening and to better protect people if they do fall victim.

“The UK’s payments industry is rapidly evolving, with next steps for open banking and the new payments architecture (NPA) on the horizon,” affirms Ms Simpson. “It is important that as the sector evolves, people are still able to make payments confidently and safely.”

Key components of this evolution are improved intelligence sharing to spot and prevent fraudulent transactions, the publication of data on how well firms are protecting customers from scams and the continued widespread rollout of Confirmation of Payee (CoP) – a name checking service for UK-based payments.

“Such actions will have an immediate impact for consumers, bolstering their protection,” expects Mr Castro. “For financial institutions (FIs), we anticipate a doubling of reimbursements, as 95 percent of all cases will be reimbursed under the new PSR scheme, split between the payer and payee banks.

“Further collaboration in the fields of data sharing and innovation will also be required from all market participants to develop new processes,” he concludes. “This will, ultimately, lead to reduced losses for both FIs and their customers, improving the situation for all.”

Fraser Tennant