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Payments players have said that they anticipate that 2023 will see the challenges around tackling fraud continue to play out, as VIXIO research finds that it is a top ranking priority for compliance teams to fix.
In payments, fraud is a whack-a-mole issue. Once you manage to solve one form of fraud, the criminals move elsewhere, and customers are hit by another.
In the UK, the issue of fraud has hit the headlines over the last couple of years for all the wrong reasons and continues to plague payment firms, regulators and end users. It is also becoming a burgeoning problem for the EU players.
Regulators generally consider strong customer authentication (SCA) to have been a success and the payments ecosystem appears to have adjusted to the change.
Recent research from the Bank of Italy found there was a 58 percent lower risk of fraud for card-not-present payments and an 81 percent lower risk for e-money transactions carried out using SCA.
However, regulators in countries including France and Denmark have acknowledged that fraud is on the rise elsewhere.
According to Volante Technologies' Vinay Prabhakar, for example, in the real-time payments world, fraud is becoming a critical factor in the end-to-end process.
For example, traditional financial institutions have legacy systems that are 30 to 40 years old, and are not designed for the real-time payments world. "The customer experience is generally not good."
The global marketing chief also pointed out that EU plans to create an offline check for issues such as fraud and sanction screening could "drastically increase fraud, determining a lack of trust on the client side".
"We expect to see an increase in the number of fraudulent transactions, as transaction volumes overall maintain their pace of growth," he predicted. "We also expect to see an increase in the variety of types of fraud, and new innovations in fraud, as the variety and type of payments grow."
A neverending story
"As long as payments have existed, there has always been fraud risk,” said Max Savoie, a partner at Sidley Austin.
The card industry has been trying to deal with fraud since its inception with a fairly good degree of success, he continued. “Digital payments, and making payments easier and faster, has come with new challenges, as well as new opportunities, around tackling fraud.”
“The rise of ecommerce has also created an environment where certain types of fraud risk have expanded but a lot of work is going into mitigating these and I do think the challenges are surmountable."
Concerns over fraud’s ongoing presence is also reflected in VIXIO’s upcoming 2023 annual report, "Surviving and Thriving In Challenging Times".
VIXIO surveyed senior compliance professionals in Brazil, Germany, the UK and US, with nearly half (47 percent) of respondents listing fighting fraud among their top compliance priorities.
This ranked highest overall in terms of compliance team priorities, above other issues such as consumer and data protection, and money laundering.
According to Andrew Neeson, VIXIO’s research director: “Our 2023 Survey not only shows fraud to be the number one priority among compliance teams, but that rising fraud rates are also considered among the greatest threats to their organisations prosperity over the coming 12 months.
“As well as the actual costs of fighting fraud and reimbursing customers, there is also the reputational damage for firms and the impact it has on consumer confidence in using digital payment systems.”
For Geoff Brown, chief executive of the US-based Highline, a bill-payment provider: “Fraud is always an issue, but it will be felt acutely in a year where profitability is more important than growth.”
Fraud will especially be felt in newer sectors of neo-banking and buy now, pay later (BNPL). “This is likely the distinguishing factor between those who turn a profit or not. Successfully managing fraud takes a full suite of tools and consistent analytic rigour to balance friction versus risk mitigation.”
UK and EU
"The UK and EU are moving in the right direction on fraud, from a regulatory perspective and also on the issuer side,” said Kush Shah, senior product manager at Bottomline Technologies.
Shah listed rules such as strong customer authentication as a success for dealing with fraud. “One thing I think is likely is that we will see liability holders put more pressure on corporates and merchants to detect fraud.”
Fraud is beginning to increase in other areas too, he noted. “Fraud rings are using things like AI to make it harder to detect."
"There will be a shift in how we detect fraud as a business,” he said.
For example, Confirmation of Payee (CoP) coming into force throughout Europe. “This is a good foundation but we now need to look wider at where it is being targeted,” said Shah.
“Consumers are becoming more and more aware and we've got to get corporates looking at their own strategies and ways to combat this.”
Regarding the UK, Savoie said that it is difficult to know whether authorised push payment (APP) fraud will reduce with the introduction of new measures, such as the expansion of CoP.
The government intends to expand CoP in the Financial Services and Markets Bill, which is currently being passed by UK lawmakers.
The UK’s Payment Systems Regulator (PSR) has been enthusiastic about this, and in September unveiled its proposals to protect consumers against rising APP fraud, including mandatory reimbursement above a threshold of £100.
“I think this will remain a regulatory focus for some time,” predicted Savoie, noting that the EU too is likely to include related measures, particularly in respect of instant payments. “Fraud is not going away and will continue to be an issue."
However, as Neeson noted: “This threat is not just confined to the UK and Europe.
“For the first time we surveyed payments compliance professionals in Brazil who also ranked fraud as among their top threats and a priority to fight over the next 12 months. This heightened focus will likely be a consequence of the explosion in popularity of the country’s new instant payment service Pix, which has had a corresponding and well-publicised surge in APP and identity fraud.”
VIXIO PaymentsCompliance’s "Surviving and Thriving In Challenging Times" report will be published on February 14.
