Digital IDs and Financial Services Collaboration Strengthen Proactive Fraud Prevention

As payments become faster, fraudsters hide behind anonymity or concoct identities that seem legitimate, and then scam banks, merchants and individuals out of their money.

Among the most effective ways of stopping would-be criminals in their tracks is using advanced technologies and collaboration to spot red flags before the money ever leaves an account — to take action, in other words, upstream.

Data — from continuous verification to location to device-level details — is critical, and real-time analysis can help block fraudulent transactions.

In the United Kingdom, language contained in the November release of the government’s National Payments Vision noted: “For open banking to scale and help deliver more competition and innovation in the market, it needs to transition to a sustainable long-term regulatory framework.”

“The U.K. has put in place strong consumer protections for fraud, including through reimbursement of authorized push payment fraud as mandated by the Payment Systems Regulator,” the Treasury added in the whitepaper. “While this regime provides a critical safety net for consumers, it introduces new risks for firms to manage.”

Four financial authorities in the U.K. said last week that they are working to improve their cooperation and will revise their agreement as the government pursues its National Payments Vision. The financial regulators include the Bank of England, the Financial Conduct Authority (FCA), the Prudential Regulation Authority (PRA) and the Payment Systems Regulator (PSR).

Increased Embrace of Digital Payments

In discussion of the overall shift to digital, stats cited in the paper detailed that contactless payments have increased from 3% of all transactions in 2015 to 38% in 2023, and digital wallets have gained in popularity.

The PYMNTS Intelligence report “Digital Wallets Beyond Financial Transactions: U.K. Edition” found that 77% of U.K. consumers have at least one digital wallet, and 44% of consumers online conduct commerce via digital wallet transactions.

To get a sense of the financial impact, banks and financial services firms in the U.K. are required to reimburse the victims of authorized push payment (APP) fraud up to 85,000 pounds (about $106,000). APP fraud cost U.K. residents $433 million in 2023.

Focusing Upstream

In the section titled “Focusing on upstream prevention, including intelligence sharing,” the U.K.’s National Payments Vision whitepaper said that “more focus must be placed on fraud prevention,” and “that more can be done to prevent fraud upstream, including through sharing intelligence, both within and across sectors. Within the financial services sector specifically, there are a number of promising solutions which allow firms to share data for the purposes of tackling fraud, either before a transaction is initiated or [in] real time during the processing of a payment.”

In an interview with PYMNTS in April, Intellicheck CEO Bryan Lewis said his firm is actively exploring a consortium approach to fighting digital ID fraud through an interoperable network where financial institutions can share trust and verification outcomes.

In a separate interview with PYMNTS in February, Kyle King, who was director of product management at NCR Voyix at the time and is now executive director of Candescent, said data used before transactions take place include additional factors, such as location-based identifiers and behavioral biometrics.

This evolution to a three-, even four-factor multifactor authentication workflow can improve security, he said.

In another example, J.P. Morgan Payments said in October it partnered with predictive bank account and payment intelligence company ValidiFI to validate bank accounts and transactions.

“The world needs to move away from risk-based authentication (RBA), which is probabilistic, and adopt a deterministic approach based on keys bound to identities,” Prove Identity CEO Rodger Desai told PYMNTS in May.

Digital IDs linked with biometric authentication make it difficult for fraudsters to use stolen credentials. Real-time identity verification ensures that fraudulent transactions are identified and blocked.

In October, Ingo Payments formed a partnership with Sardine to combine data sources and technology to detect and fight against account opening funding fraud.