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FCA Consults on new Powers for the Payment Services and E-money Sectors

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FCA Consults on new Powers for the Payment Services and E-money Sectors

If you provide payment services or issue e-money (or both) in the UK and you aren’t authorised under the Financial Services and Markets Act 2000 (“FSMA”) you currently enjoy the relatively light touch regulatory regime established under the Payment Services Regulations 2017 (“PSRs”) and the Electronic Money Regulations 2011 (“EMRs”).  But that is likely to change.

When they were introduced, the PSRs gave the FCA new powers to extend the general regulatory framework set out in the Handbook of Rules and Guidance to payment institutions (“PIs”), small payment institutions, registered account information service providers (“RAISPs”), EEA authorised payment institutions, EEA registered account information services providers and electronic money institutions (“EMIs”);[i] and it intends to use those powers.

In this context, the FCA has published Consultation Paper CP18/21 in order to consult on the following proposals:

  • Extending the Principles for Businesses and associated guidance to
  1. payment services and connected activities,
  2. the issuance of e-money (where it is not already a regulated activity) and connected activities, and
  3.  EMIs, PIs and RAISPs when carrying on these activities.
  • Applying the communications (including marketing communications) rules and guidance in BCOBS 2 to communications with payment service and e-money customers and extending their application to EMIs, PIs and RAISPs

The kicker here is that once the consultation period is complete, the FCA does not intend to implement any transition period following the publication of the policy statement which will contain the final rules.  Firms will, therefore, be expected to comply with the new requirements immediately from the point of publication.

Extending the Principles for Businesses

Gareth Malna

Gareth Malna

As a principles-based regulator, the FCA is keen to ensure that it can intervene across the full body of firms it regulates in order to stop behaviours that it believes are detrimental to consumers or which are inconsistent with the general principles that firms should comply with the demonstrate good business practices in the regulated world. Under these principles firms should:

  • conduct their business with integrity;
  • conduct their business with due skill, care and diligence;
  • take reasonable care to organise and control their affairs responsibly and effectively with adequate risk management systems;
  • maintain adequate financial resources;
  • observe proper standards of market conduct;
  • pay due regard to the interests of their customers and treat them fairly;
  • pay due regard to the information needs of their customers and communicate information to them in a way which is clear, fair and not misleading;
  • manage conflicts of interest fairly;
  • take reasonable care to ensure the suitability of advice and discretionary decisions for any customer who is entitled to rely upon their judgment;
  • arrange adequate protection for clients’ assets when they are responsible for them; and
  • deal with regulators in an open and cooperative way and disclose to the FCA appropriately anything relating to the firm of which that regulator would reasonably expect notice.[ii]

In the existing regime the above principles only apply to firms that carry on an activity regulated under FSMA, certain activities carried on as ancillary to a regulated activity and limited unregulated activities.  Meanwhile, PIs and EMI are subject to a general prohibition against unfair commercial practices in Regulation 3 of the Consumer Protection from Unfair Trading Regulations 2008.  The FCA considers that the lack of consistency between these two regimes creates the opportunity for firms in the payments space to carry on misleading practices and to communicate with their customers in ways that are not clear or transparent.

Extending the Communications Rules and Guidance 

EMIs, PIs and RAISPs are not currently restricted to any particular conduct requirements under the PSRs and EMRs when communicating with clients or the wider world.  This has led to dubious marketing practices where firms intimate that they offer services that they do not: take for instance the neo-banks that start out as e-money institutions before graduating on to a full FSMA authorisation but that, throughout their lifecycle, attract customers to do their ‘banking’ with the firm.

The FCA also sets out in CP18/21 the example of operators of currency exchanges who entice customers with exchange rates that aren’t attainable by consumers, but who only find out about the real rates that will apply after going through a sign-up or on-boarding process.

The FCA is, therefore, proposing to apply the communications rules in BCOBS 2[iii] to PIs, EMIs and RAISPs when providing payment services and connected activities.  This would include the implementation of:

  • the fair, clear and not misleading rule, i.e. that firms must take reasonable steps to ensure that a communication or a financial promotion is fair, clear and not misleading;[iv]
  • systems and controls or policies and procedures to ensure the appropriate implementation of the fair, clear and not misleading rule;
  • the rules around the marketing of savings accounts when conducted as a direct offer financial promotion;[v] and
  • other general rules as set out in BCOBS 2.3 in relation to communications and financial promotions.

Affected firms should note that this does not amount to an extension of the financial promotions rules in section 21 FSMA and that the BCOBS fair, clear and not misleading rule is to be implemented in a manner proportionate to the activities of the firm in question and reinforce Principles 6 and 7 (i.e. paying due regard to customers’ interests and their information needs).

What is the effect?

Regulated firms will already have a general duty to operate their businesses sensibly and in accordance with the applicable regulatory rules – which will have been considered as part of the process for applying to the FCA for authorisation under the PSRs / EMRs.

However, the FCA’s principles for business are wide ranging, primarily as a result of their lack of specificity, and firms should be ensuring that their general practices are brought up to the level expected by the FCA.  In this regard, the FCA’s stance is clear (and I am quoting from CP18/21 here): “we would expect well-managed businesses to find much that is familiar, given the authorisation, prudential and conduct provisions of [the second Payment Services Directive] and [the second Electronic Money Directive] and other more general requirements that apply to them.”  Of course, not all businesses will meet the definition of a “well run business” in the FCA’s eyes and there will be work to be done by those firms. And yes, there will be a cost implication – “particularly around familiarisation with the extended regime and ensuring/demonstrating compliance” according to the FCA.

That last point is important.  Firms will be required to demonstrate to the regulator that they are acting in accordance with the principles and that their communications are compliant.  In practice, this will mean documenting processes, decisions and considerations taken into account in operating the business and being seen to act with integrity with all counterparties (including consumers and the FCA).

In addition, any marketing campaigns should be reviewed as against the BCOBS standards, which is likely to lead to more legal/compliance intervention in the final content in the case of firms who take these obligations seriously.

Ultimately, the proposals are intended to foster greater consumer protection and it is hard to argue with that in this context.  But firms should be ready.  With no transition period the FCA’s new teeth will bite as soon as the policy statement is published sometime before 31 January 2019.

[i]See paragraph 3 of Part 1 of Schedule 6 of the Payment Services Regulations 2017.  See also paragraph 2A of Schedule 3 of the Electronic Money Regulators.

[ii]See the PRIN 2of the Principles for Businesses Sourcebook of the FCA Handbook.

[iii]The Banking Conduct of Business Sourcebook of the FCA Handbook.

[iv]BCOBS 2.1.

[v]BCOBS 2.2A.

Finance

The value of digital identity in payments

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The value of digital identity in payments 1

By Vince Graziani, CEO, IDEX Biometrics ASA

In ever more challenging times, the payments industry needs to maintain trust by finding a way to protect consumers from the constant threat of payment fraud and theft. Consumer’s wishing to limit physical contact during the current pandemic has led to the popularity of contactless payments which has accelerated in multiple territories.

In the US, one in five shoppers have made a contactless payment for the first time during the pandemic according to research published in August by the National Retail Federation and Forrester. The bad guys have unfortunately taken note. This has led to a real need for the industry to fight back with enhanced security.

At the 2019 Money2020 Europe conference, there was a universal call for a comprehensive form of digital identity (ID) to enable digital payments. A form of digital identity that would make cashless payment interactions – secure, intelligent, efficient and private. The feeling was unanimous: without functioning digital ID, the payments revolution will stall.

Unlocking the payment ecosystem

In an increasingly connected world, consumers find themselves needing to authenticate their identity daily. Whether that be with financial institutions, retailers, government departments or healthcare providers. Yet, it is rarely known where consumer data is stored, how secure it is or how it may be traded. Privacy regulations such as the European Union’s General Data Protection Regulation (GDPR) have attempted to restore some trust, but the industry still has a way to go.

Currently, authentication is fragmented and unwieldy. It requires a mix of hardcopy documents, online login credentials and digital wallets. This is not only frustrating for consumers but leads to the reuse of passwords and PINS that make the user vulnerable to fraud. Mastercard believes there is a clear need for a verified identity that is accepted globally and across multiple digital touchpoints and doesn’t involve aggregating more information in potentially vulnerable data stores, but instead gives the individual control over their identity data.

An integrated digital ID scheme would enable the payments industry to fight fraud on a global scale. It would also meet the pressing need for a payment authentication system that consumers can access anytime, anywhere, and on any device. This joined-up approach is vital to ensure no consumer is left behind as the world continues its digital transformation.

Providing access to a singular, unified digital ID will not only streamline the identity process, but also unlock new and enhanced consumer experiences during this digital transformation. Particularly in the new breed of smart buildings and cities, where everything from travel to payment systems will be connected to a user’s identity.

What form should our digital ID take?

While the need for digital ID is well established, the form it will take is less clear. There are two main challenges that payment providers need to overcome with a potential new identity solution: onboarding new users and ensuring the digital ID is compatible with all transactions.

Placing individual consumers at the centre of their own digital interactions will ensure confidence and broader adoption of new technology payments and services. Yet, for this to be successful, the payments industry must adopt a process that is simple, familiar and easy to understand.

Fingerprint biometrics as a digital identity

The use of fingerprint authentication to unlock a smartphone is now deeply entrenched. As far back as 2016, 89 percent of users with compatible iPhones were using fingerprints to unlock their devices. The solution for a frictionless onboarding has been at our fingertips the whole time.

Payment providers can incorporate fingerprint biometric sensors directly into their new breed of smart payment cards. A biometric payment card may be a new concept, but payment providers and retailers across the world are already using contactless card technology in the payment process, so it is the next logical step. Consumers are now used to carrying a card and tapping it for contactless payments. Plus, as we have seen, consumers are used to using their fingerprint as an authentication mechanism. Perhaps biometric cards could be the catalyst for financial inclusion desired by the World Bank, as they don’t require the ownership of expensive smartphones in developing nations.

Building a chain of trust with biometrics

Continuous developments in payment regulation mean that secure authentication is imperative. Under the second Payment Service Directive (PSD2) European banking regulation, all payment transactions will soon require Strong Customer Authentication (SCA) to validate users at the point of transaction to reduce fraud and increase security for customers. SCA requires two forms of authentication for every transaction above the contactless limit. While one is generally something you have like a smart card, the second can be something you are like a fingerprint.  Using a fingerprint means that it can be used across multiple platforms and is always at hand. There should be no trade-off between convenience and privacy and fingerprint biometrics delivers on that expectation.

Biometrics can play an essential role in digital ID, significantly limiting exposure to potential fraud and criminality. The addition of a biometric sensor onto a payment card creates a secure ‘chain of trust’ that indelibly connects the user to the card. Furthermore, digital ID has the scope to be extended far beyond payments and used as a unique identifier in areas such as access, government ID and even across IoT devices.

Securing the future of the payments industry

While the world is becoming ever more cashless, commentators and analysts all agree – without a fully functioning digital ID, the payments revolution will stall. As Tony McLaughlin, Emerging Payments and Business Development at Citi put it recently: “If we fix digital identity, we fix payments”. I couldn’t agree more. Both consumers and the payments industry need a user-centric digital ID that is owned and managed by the individual, so they can unlock the full advantages of a transformative digital payment ecosystem.

Using fingerprint biometrics as a digital ID in a payment card will transform the way people authenticate transactions. This integration would enable consumers to confirm their identity wherever they are, on any device, and across every transaction. It will change the face of digital identity as we know it.

We believe that digital interactions should be privacy-enhancing, secure, intelligent, and efficient. To facilitate this, consumers require a user-centric digital identity that is owned, managed, and controlled by the individual. It is time to place individuals at the heart of their digital interactions globally.

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Finance

It’s time to press ‘reset’ on travel and expense processes

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It’s time to press ‘reset’ on travel and expense processes 2

By Rudy Daniello, EVP of Corporations, Amadeus

Travel & Expenses(T&E) is a large spend category for companies across the globe. In fact, for many firms, T&E is the second largest indirect spend category. While we all know the inherent value personal, face-to-face meetings bring, it’s important to quantify and manage the cost, especially in today’s climate.

While business travel has slowed due to COVID-19, many companies have accelerated their digital transformation during this period, especially in the way their teams work. One area that is under the spotlight as organisations look to transform digitally and control costs and processes better, is T&E.

Poor business travel spend management can frustrate staff, and lead to cost and productivity inefficiencies. Within the context of COVID-19, controlling T&E spend is likely to be even more important, so companies need a clear strategy around their travel and expenses.

To understand how organisations were assessing their T&E at this extraordinary time, Forrester Consulting conducted research on behalf of Amadeus, surveying more than 550 key decision makers involved in T&E solutions at large organisations worldwide.

The report, titled Digital Transformation For Travel & Expense: Balancing Process Efficiencies, Compliance, And Employee Experience highlights the challenges organisations face as they assess their T&E systems and processes before business travel picks up again.

The good news is that nearly three quarters (74%) of respondents agree that the improvement of T&E management processes and tools is critical to reducing costs, increasing efficiency, improving employee engagement, and forms part of their digital transformation.

All of these factors are key business objectives, so how can organisations address their T&E?

Focus on Systems

The research found that a lot of organisations are still relying on outdated systems to manage their travel and expenses. More than one in five (22%) of centralised companies still use spreadsheets to track expenses and just 15% of organisations use a cloud-based T&E solution.

Many decentralised companies also still rely on manual processes – either fully or partly – for their T&E. These outdated processes and systems add pressure on staff, managers, auditors and accountants. Reassess T&E Processes

Having the right systems in place will help rethink T&E processes, from researching hotels and appropriate transport, to making expenses claims post-trip. Travel managers surveyed difficulties around compliance-related expense tracking, reconciliation and auditing as a key challenge.

Three quarters (74%) of travel management leaders want to increase automation to reduce their reliance on manual processes. However, one in five (20%) organisations do not feel they are getting the analytical and reporting capabilities they need, despite data being a core priority.

The research shows that Human Resources (HR) and IT have key roles to play in redefining their organisations’ T&E processes.

Enable Smarter Booking

The research also finds that T&E leaders want to be able to manage the huge amount of content out there so that they can make clear decisions when making travel bookings. Multinational organisations need a global solution so that they can access the best deals and make more informed business travel booking decisions.

Integrated T&E solutions deliver cost and efficiency benefits

According to the research, those organisations that use an integrated T&E tool are much less likely to receive complaints from their traveling staff. More than a quarter (27%) of organisations that use an integrated T&E solution reported zero complaints from employees.

Integrated T&E solutions are essential for companies as they help their employees, take advantage of the best offers for the business trip. They also streamline expense processes, making it quicker and easier to claim and have their expenses approved and paid back.

Firms that do not have integrated T&E solutions report a 29% increase in delays in reimbursing expenses. Almost all (96%) of organisations interviewed that use integrated tools are satisfied with their T&E processes. Nearly three quarters (73%) of them even plan to expand or upgrade further.

Improving T&E is a team effort

What the Forrester Consulting research demonstrates clearly is that there is consensus across the board that T&E systems and processes can be improved.

Three quarters (74%) of IT leaders are focused on improving end-to-end experience of T&E processes, and 73% are committed to improving integration between T&E tools and other systems (73%).

And it’s not just IT leaders who see the value in integrated T&E solutions. More than four out of five procurement managers see improvement of T&E tools and processes as a key part of their organisation’s digital transformation, the highest of any group interviewed by Forrester.

While online conferencing has become the norm for many organisations, nothing can replace the value of face-to-face meetings. When business travel picks up again, companies with integrated T&E systems and processes will quickly see the benefits.

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Finance

Covid-19 and the rise of remote payment fraud: how do we catch a digital thief?

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Covid-19 and the rise of remote payment fraud: how do we catch a digital thief? 3

By Evgenia Loginova, co-founder and co-CEO of Radar Payments

Covid -19 is finding different ways to hurt our finances – and like the virus, the threat is invisible.

Each time we tap our payments cards or make a purchase online, there’s always a risk of getting caught out by a digital fraudster. Yet during the global pandemic, the issue has not only escalated, but the ways in which people are conned have changed to reflect new social distancing and lockdown behaviours.

Indeed, the crisis has transformed the way we buy and shop – and those that are being targeted most are the millennial generation.

What are we doing differently?

It’s all down to the way we are interacting with service providers.

Lockdown behaviour

Since the World Health Organisation issued a pandemic in March, global payment fraud went up 5% with 100 million suspected fraud attempts from the period between March – April.

According to TransUnion, the firm analysing the data, billions of people around the world have been forced to spend time at home, which has led to industries such as financial services, ecommerce and healthcare to experience disruption in ways that have not been seen for generations.

This is due to the spike in online transactions, as more people adjust to the new normal of spending less time at the shops and more time doing everything on their digital devices.  And with so many transactions shifting online – fraudsters are spending more time there too. These culprits are fully remote and are always on the lookout for vulnerable victims – as well as vulnerabilities within the payment systems.

Digital savvy criminals

Businesses that come to grips with the problem will manage to stay afloat – but they won’t be able to do it without fraud prevention tools that can identify suspicious activity without adding friction to the customer payment experience.  In other words, customers must be protected from theft – as well as the truth. They shouldn’t even know that they’re under attack in the first place. It’s all about prevention- or at least as much as what technology can provide.

Without some technological intervention, there won’t be prevention, as companies simply cannot keep up with the proliferation of digital thieves.  Culprits are operating individually or in criminal gangs or both – and usually in countries that are often forgotten by global leaders.  For example, the telecommunications sector witnessed a 76% increase in card fraud a month after the global pandemic was declared – and the top country for suspected fraud origination was Timor-Leste – how many people even know where that is? (East Timor – formerly part of Indonesia, if you must ask!). Financial services saw an 11% increase in identity theft that same period – with most suspected culprits based in war torn Syria.

Exploiting vulnerabilities

Despite their location, fraudsters are quickly adapting to consumer behaviour, and finding ways to attack. With less in-person transactions taking place, criminals are doing things like infecting online points-of-sale with malware that enables them to skim credit card details of previous customers.

Evgenia Loginova

Evgenia Loginova

From our experience with our fraud detection networks the numbers point out that missing card fraud, in particular, has shot up by 70% over the past few months. This is where people’s card details are being used by criminals to make purchases, when they are not in possession of the card. They’ve just stolen the numbers and additional critical security information such as expiry date and CVC2/CVV2.

Identity theft is also on the rise, as well as phishing and social engineering attacks. For example, in the UK alone there’s been a rise in criminals impersonating trusted organisations like the NHS or HMRC to trick people into going online and paying for services that are fake or giving away their money and information to charities and other organisations that are fake.

Local councils in Britain have noted  a 40% increase in reported scams since the start of the pandemic, while Citizens Advice believes one in three people have been targeted by a Covid scammer.

This is a problem that is too big to ignore. The moment the fraudsters have your payment details – whether they’ve stolen it or you’ve given it to them under false pretences, the problem leads to losses for the victim and the businesses and organisations too.

With Covid and lockdown, fraud has gone fully remote and everything from e-commerce and digital banking has been a target for abuse.

In this ‘new normal’ world we find ourselves, the prevention of suspicious transactions through customer profiling and enhanced analytics, use of AI and machine learning models becomes very important.

Fortunately, digital theft is now being taken seriously.  Spending on security has skyrocketed in recent years, and the sector supplying protection predicted to grow by $6 Trillion by 2021.

Businesses that survive the pandemic must be able to anticipate and strive to block 100% of the digital theft they encounter. But to win the war against these online criminals they require a robust security strategy.

Here are some tips to consider.

Security policies should be enforced internally and across payment channels and distributed networks. This includes the core and cloud networks as well.

Security gaps should be closed.  A lot of risk can be mitigated by performing regular checks and plugging security holes, settling on a unified security framework based on interoperability, centralising visibility and control, segmenting the network to restrict the fluidity of malware and high performance, and deep integration.

Invest in AI capabilities.  Artificial intelligence possesses the sophisticated power to replicate the analytical behaviour of human intelligence, as well as enable decision-making in real time and offer predictive security notifications.

Investing in AI based security systems can significantly reduce digital attacks and spot suspicious activity.  The best ones are integrated with artificial neural networks (ANN), which combined with deep-learning models, can speed up data analysis and decision-making. It also enables the network to nimbly adapt to new information it encounters in the network.

Prevent fraud in online and then investigate. It is crucial to stop fraud before it happens. As most of the payments became remote, reaction should be super fast: high-risk transactions should be declined, low-risk passed with no friction and suspicious challenged. This raises the importance of finding the balance between customer experience and risk mitigation as never before. And even with AI and enhanced analytics for complex cases an expert with natural intelligence should be equipped with all needed information for relevant and adequate decision-making.

Lingering problem

Digital crime won’t disappear as long as there’s an opportunity that criminals can exploit. As the world braces for a new wave of lockdown measures, businesses operating in the online sphere must remain vigilant and prepare for more attacks – or face losses that could be impossible to recover from during these challenging economic times.

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