Combatting payments fraud with Open Banking

Published : 3 years ago, on 22/06/2021

By Andria Evripidou, Policy Lead at Yapily

There’s an urban myth that only the elderly or less technologically savvy fall victim to financial fraud. This couldn’t be further from the truth.

Financial fraud is increasingly sophisticated and there has been a significant increase in scams during the course of the pandemic. According to the latest figures from UK Finance, £1.26bn was lost to fraud in 2020. A significant proportion (38%) of which was Authorised Push Payment (APP) fraud – where a person is tricked into authorising a payment to a criminal’s account through sophisticated social engineering or other means of manipulation. These types of scams amounted to £479m lost in 2020.

With these numbers, it can’t just be those less astute falling victim to financial fraud, whether as individuals or in a business context. TSB recently found that those aged between 18-24 are most at risk of falling victim to fraud as they are less likely to identify fraudulent messages, when compared to older generations.

But despite banks and card companies preventing £1.6bn in unauthorised fraud in 2020 – equivalent to £6.73 in every £10 of attempted fraud being stopped – there is still work to be done when it comes to fraud protection.

New channels, new risk

The risk of falling victim to fraud has always existed. However, we have seen an exponential rise in the use of new digital payments options over the last year. European consumer adoption of digital services jumped from 81% to 94% in the first few months of 2020 – a rise that under normal circumstances would have taken around two to three years to happen. As such, there are now more channels and opportunities for criminals to try their luck.

The shift away from cash during the pandemic saw 3.2bn mobile wallet transactions made in the UK – a Year-on-Year growth of 25.5% – with mobile wallet adoption rising to an historic 46% globally in 2020 according to latest research. Not unsurprisingly, when looking at Europe’s rates of card fraud versus real-time payments fraud, which were roughly on par only a couple of years ago, “non-plastic” fraud is rising at a much faster pace.

One such new channel that has seen significant adoption over the last year is Open Banking. When Open Banking launched in 2017, there were loud concerns from the established players in the industry that FinTechs would not have robust enough Know Your Customer (KYC) and fraud protection capabilities, which in turn would leave themselves, banks and consumers at risk. Three years on, no evidence to this effect has materialised and it simply could not be further than the truth.

Combating fraud with Open Banking

The true impact of fraud often goes far beyond financial losses – eroding customer trust and damaging relationships between companies, partners and suppliers. But harnessing Open Banking infrastructure can actually add an additional layer of protection to account-to-account payments.

In the UK, legislation requires Open Banking companies to do their own individual transaction monitoring and KYC on top of the checks conducted by banks. This additional check adds extra value to security. Given how nascent Open Banking technology still is, the lack of legacy infrastructure means only the latest technology such as advanced data science is employed to better detect fraud.

Further, payments made using Open Banking APIs are by their very nature secure. Every individual payment requires a unique authorisation token, which once used, cannot be used again. Even tokens for recurring payments, such as standing orders for mortgage repayments, can be revoked and immediately rendered useless if suspicious activity is detected.

Open Banking payments are also built with Strong Customer Authentication (SCA) in the flow. In practice, this means a payment can be confirmed via the native banking application on the web or a mobile device. This not only reduces the risk of fraud by eliminating card details from the process, but it means in app-to-app payments consumers can authenticate payments using facial recognition or their fingerprint to log into native apps, increasing security further.

Financial fraud is increasingly sophisticated and with new payment methods and channels being adopted at lightning speed, the industry as a whole must come together to combat criminal activity. We need to bust the myth that Open Banking isn’t secure to drive greater adoption. As harnessing Open Banking infrastructure adds a critical extra layer of security for all players – banks, consumers and businesses. Something that is needed now more than ever.