In the fast-paced digital world, financial transactions are increasingly moving online. However, this shift also brings a heightened risk of fraud, particularly Authorized Push Payment (APP) fraud.
This type of fraud occurs when individuals or companies are tricked into sending money to accounts controlled by cybercriminals. As the financial industry fights this growing issue, experts weigh in on measures to mitigate risks while ensuring consumer protection remains important.
What is Authorized Push Payment (APP) fraud?
APP fraud occurs when someone tricks another person into sending money directly from their bank account to an account controlled by the scammer. Typically, scammers use deception, like pretending to be a bank representative, a lawyer, or a seller, convincing the victim that they need to transfer money for a legitimate reason.
Once the money is sent, recovering is challenging, as the victim authorized the transaction. This type of fraud is becoming increasingly common.
According to the Scamscope Fraud Report, Losses to APP scams are expected to record an average compound annual growth rate (CAGR) of 11% from 2022 to 2027 across our studied markets (U.K., U.S., India, Brazil, Australia, and Saudi Arabia), reaching a total of USD 6.8 billion.
This requires firms to be vigilant about whom they send money. Also, they must verify the legitimacy of requests for money transfers.
The Repayment Story
In 2019, seven payment service providers created a voluntary code to help customers who lose money to APP fraud. Now, ten members, covering 19 brands and over 90% of the UK’s APP transactions, follow this code.
It introduces the Contingent Repayment Model for personal customers, small charities, and micro-enterprises, focusing on better fraud detection, warning potential victims, and giving advice on protection against APP fraud.
Also Read: 5 Principle Methods for Business Fraud Prevention
However, PSR in the UK has introduced new rules for reimbursement.
New Rules for Reimbursement on APP Fraud Coming into Force in the UK
On October 7, 2024, the UK’s Payment Systems Regulator (PSR) implemented a mandatory reimbursement policy for payment service providers (PSPs) to aid customers affected by APP fraud.
Key elements of the reimbursement obligation
- Option for Claim Excess: Under the new reimbursement regulation, Payment Service Providers (PSPs) can impose a claim excess, with the highest amount being USD 130 for each claim.
- Cap on Reimbursement: The new reimbursement guidelines stipulate a ceiling on the amount payable for APP fraud claims, fixed at USD 541,714 per incident.
- Absence of Minimum Threshold: For victims of APP fraud, the regulations do not establish a minimum claim value threshold.
Industry Perspectives on Reducing APP Fraud
While the regulation seems to have impacted customer interest, some industry leaders feel this impact will not be substantial. The amount that has been fixed for ceiling is good enough for most fraud payouts.
Dima Kats, CEO and Founder of Clear Junction provides valuable insight into regulatory measures to mitigate APP fraud risks.
He says, “lowering the APP fraud reimbursement cap may lead some consumers to feel their protections are being reduced, but the reality is that 99.7% of fraudulent payment claims will still be fully reimbursed.”
Kats highlights the importance of maintaining consumer confidence in digital payment systems and that most fraudulent claims will continue to receive full reimbursement despite reimbursement cap changes.
He elaborates on the cause behind adjusting reimbursement thresholds, explaining that managing payment firms’ risk exposure is a strategic move. “By lowering the reimbursement cap, payment firms can better manage their exposure to risk, reducing the likelihood of fraudsters exploiting the new regulations,” he explains.
This approach aims to ensure a sustainable and secure financial ecosystem. It will also help balance the needs of consumers and payment providers.
The Role of Regulators and Payment Firms in Improving Security
While regulators aim to ensure that security compromises are reduced, for FinTech transactions, there are other repercussions as well. Fintech firms and financial companies will now have to work harder on their security stance. But since security risks can never be completely eliminated, their risks will continue. And with the reimbursement due to fraud now facing a ceiling, they will need to face the ire of customers.
Industry leaders are taking a milder, more reconciliatory stand here. They need to now work to ensure their security tools evolve to meet current risks. At the same time, they intend to continue to ensure their customers face minimal impact of security threats.
Alex Reddish, Managing Director of Tribe Payments, also addresses the proposed adjustments to reimbursement caps. He said it promotes a healthier balance between preventing fraud and promoting the growth of the UK’s FinTech sector.
“The proposed reduction in the APP fraud reimbursement cap to USD 1,10,970 is intended to create a more effective balance between robust fraud prevention and the continued growth of the UK FinTech sector,” Reddish states.
He reassures that despite the reduced cap, the protection level for consumers remains high. This ensures continued trust and confidence in digital payment systems.
“By stressing that consumer protection remains at the heart of the PSR’s approach, this should help preserve trust and confidence in the system,” Reddish affirms.
He highlights the need to minimize fraudsters’ avenues to exploitation, thereby enabling an environment conducive to sustainable growth and innovation within the FinTech industry.
Also Read: How CISOs can Use Threat Intelligence for Fraud Prevention
The Way Forward
As the financial sector evolves, open dialogue between regulators, industry stakeholders, and consumers is crucial. Adapting to changes in consumer behavior and technological advancements will require a flexible and responsive regulatory framework.
Kats and Reddish’s insights underscore the complexity of providing robust consumer protection while encouraging innovation and growth in the FinTech sector.
As efforts to combat APP fraud advance, the industry’s collective commitment to security, innovation, and consumer trust will be pivotal in shaping the future of digital finance.
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