UK APP Fraud Rules Will Keep Faster Payments Safer Long Term, Experts Say

The U.K. has been experiencing a widespread payments fraud epidemic in recent years. And to stem the tide, U.K. regulators are preparing to mandate that banks reimburse victims of authorized push payment (APP) fraud, one of the popular scams in the country, whereby individuals or businesses are manipulated into making real-time payments to fraudsters impersonating a payee.

In fact, data from UK Finance shows that APP fraud increased 40% between 2020 and 2021, amounting to £583 million ($706 million) in losses in 2021 and more than half of the £1.3 billion ($1.57 billion) lost to overall fraud incidents that year.

But while refunding victims could be seen as a step in the right direction, experts have flagged a moral hazard risk as the rules could make individuals less inclined to take the necessary precautions when making payments.

As PYMNTS reported, a consultation paper published earlier this year expanded on some of the measures, which will require certain payment service providers (PSPs) to publish comparative performance data on their handling of APP scams starting this year. These include reporting on the proportion of APP scammed customers who are left out of pocket, the sending PSPs’ scam rates, and the receiving PSPs’ scam rates.

In an interview with PYMNTS, Suzie Miles, partner at U.K. law firm Ashfords, acknowledged the impact these requirements could have on the journey to frictionless banking transactions, but noted, however, that placing a greater responsibility on financial institutions to prevent fraud is not out of place.

“Given that banks are best placed to mitigate the risk, I can understand why this approach has been taken,” Miles said in an interview, adding that the broader PSP landscape will need to be supported to ensure the rules yield the intended results.

There is also concern that the regulation risks slowing down progress made on the faster payments front, with additional checks possibly hindering the shift to instant payments across Europe.

Here too, Miles said that while there could be an impact in the short-term, the fact that banks will be forced to adopt stronger fraud measures will safeguard real-time payments in the long term.

“I think we will see friction and perhaps slower transactions in the short term, but it will focus PSPs to look at their fraud measures, and I’m certain that in the long term, it will become embedded in their practice,” she argued.

Putting the UK at the Forefront of FinTech

Miles said regulations like the APP fraud rules present banks, PSPs and other players in the financial service space with an opportunity to review their internal processes and beef up security to better protect users against fraud.

“It’s an opportunity for players to look at what they’re doing and what happens if something goes wrong. That’s what underpins a lot of regulation — the need to try and protect the economy, protect consumers, and stabilize whatever it is that has been regulated,” she remarked.

She added that RegTech and fraud technology more broadly are going to grow in popularity in the next five to 10 years and can help financial service providers better combat fraud.

Kate Frankish, chief business development officer and anti-fraud lead at Pay.UK, echoed similar sentiments in a previous interview, noting how technology, such as using artificial intelligence (AI) and machine learning, can be used to assess patterns and help FIs with real-time risk scores which they can then leverage to make better decisions when helping their customers.

Finally, Miles said collaborative efforts between the government and financial sector will increase, as seen in the growing number of regulatory sandboxes being launched for specific areas of the financial market.

“I think [collaboration is] going to be huge and will allow us as a jurisdiction to develop best practices, especially as we strive for the U.K. to be at the forefront of the FinTech sector,” she said.

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