APP fraud is a growing problem for banks

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Authorized Push Payment (APP) fraud is currently rampant in the UK. In the first half of 2021, cases increased by 71% and for the first time exceeded card fraud in terms of the amount of money stolen.

These scams involve consumers and businesses tricked into sending money to criminals using stolen or fabricated identities. They target consumers using fake websites, emails and phone calls to bypass the bank’s stringent security checks.

One of the reasons for this increase is the introduction of real-time payments through the Faster Payments program in the UK. Launched in 2008, the system allows real-time payments online or through smartphones or self-service machines. During the Covid-19 pandemic, consumers and businesses have increasingly embraced digital payments.

However, these payments are irrevocable. In the case of APP fraud, victims cannot reverse the payment once they know they have been scammed. Naturally, this has made the UK a much more attractive market for criminals.

Growing problem for banks

According to figures from banking trade body UK Finance, APP fraud rose from £208m in the first half of 2020 to £355m for the same period in 2021, a 71% year-on-year increase. Applying the same growth to the second half of the year, total APP fraud losses for 2021 are expected to reach £819 million.

Although it is consumers who suffer both financially and emotionally from these scams, banks also have to foot the bill in many cases. For example, the TSB reimbursed 97% of all bank fraud cases under its Fraud Reimbursement Guarantee.

Although the numbers may differ from bank to bank, they all face the same impossible challenge: either absorb their customers’ losses or lose those customers due to a lack of protection. And all this amidst a rapidly growing source of fraud.

In 2020, banks paid £207m of the £479m total cost of APP fraud, or 43%. Given the expected growth in losses, banks could have paid up to £400m in compensation once the 2021 figures are released.

These losses could increase. In an effort to limit losses from APP fraud, the UK Payments System Regulator (PSR) is pushing for banks and other payment providers to publish fraud data and mandate reimbursement to victims, a move that benefits government support.

John Glen, economic secretary at HM Treasury, said in November that the government will “legislate to remove any obstacles to regulatory action as soon as possible”.

Verify identity before money is stolen

Identity is at the heart of APP fraud.

What is needed is a way to verify the identity of people on both sides of a transaction before money changes hands. Fortunately, the infrastructure already exists thanks to Open Banking, in which banks have already invested £1.5 billion.

UK banks have verified the identity of 98% of the UK banking population, data that can be securely shared through Open Banking.

By using this information, such a system would not only significantly reduce bank losses, but also improve the reputation of banks as reliable and trustworthy depositories of customer money. Moreover, it would put banks at the center of the fight against fraud.

This type of system already exists elsewhere in Europe. Sweden launched its Bank-id in 2003 and it is now the largest electronic ID system in the country with a usage rate of 94% among smartphone users with over 6.5 million active users . It is owned and operated by several Swedish and Scandinavian banks.

A similar but independent BankID system operates in Norway, which also acts as a public service, owned and operated by a number of banks.

Originally designed as a way for consumers to connect to their online bank accounts, the system has expanded its reach as consumers increasingly transact digitally. BankID is now used to confirm online payments and even sign official documents.

The system has proven effective in reducing payment fraud from 1% to just 0.00042% of transactions.

The same system is needed in the UK – a digital identity utility that protects people’s data and allows users to prove their identity securely and easily.

The key to the success of any public service is adoption. The involvement of banks and corporations can help build a brand that the general public can trust and a system that will ultimately limit the financial, psychological and emotional impact of APP fraud.

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