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Big Banks are hampering innovation by hiding behind fraud concerns

Despite the opportunity to reduce fraud, the big banks are blocking open banking payments, leading consumers to revert back to the Visa and Mastercard, writes Crezco’s CEO Ralph Rogge.

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Photo by Sora Shimazaki from Pexels

Picture the scene: a young couple completes the purchase on their first home, the largest

payment of their lives derived from years of savings from countless hours of taxed labour. 

Sadly, due to a tragic error, the couple deposits the funds erroneously to an account belonging to malicious hackers, not the seller’s solicitor’s account as intended. Despite desperate calls to the receiving bank to freeze the funds, their lifelong savings have already been forwarded elsewhere without a trace. 

They are left helpless and without recourse.

This is a real example of one of 70,000 cases of authorised push payment (APP) fraud in the UK in 2020 accounting for £500m in losses.

APP fraud occurs when users are tricked into transferring funds to a fraudster’s account believing it to be legitimate. Typical examples involve fake invoices from a seemingly legitimate supplier. Google and Facebook have paid hundreds of millions of dollars erroneously under such scams.

APP is one of many types of payments fraud within the $5bn payment fraud market and, despite efforts to minimize fraud, it remains an inevitable evil. While initiatives like Nationwide’s Scam Checker Service are welcome unilateral efforts to counter this scourge, a global movement is gathering pace to give us a more powerful weapon in the counter-fraud arsenal: open banking.

What began in the UK four years ago is now live in ten countries, with just as many set to

launch regimes over 2022. Open banking relies on consent-driven data exchange, including both information about transactions on accounts, and pushing a payment itself.

Open banking payments are a cheaper, simpler alternative to conventional card rails that run on the de facto duopoly of the Visa and Mastercard networks. The benefits to society are many, but it isn’t working as it should, with volumes still a fraction of conventional card rails.

Why is this the case?

One of the major reasons is that the banks block many payments under the guise of protecting their customers from APP fraud. 

Many blocked payments show no resemblance to fraudulent transfers: including low-value payments below £100, regular payments to suppliers, and monthly payroll payments. In contrast to the 99 per cent processing rate for card payments, only 70 per cent of the challenger open banking payments are successful. 

While APP is a concern for all involved in payments, it is disingenuous of the banks to use it as an excuse for inhibiting innovation. In the meantime, their pals at Visa and Mastercard continue to hold all the cards.

Returning to our tragic tale of the unfortunate aspirational homeowners, an open banking payments company could have prevented the fraudulent transaction. Unlike manual bank transfers, open banking payment companies know the end recipient and have clear visibility of their bank account. 

A solicitor’s bank account is full of regular debits and credits; the fraudster’s bank account is empty. Had the victims had such visibility they would never have tapped ‘send’.

As the world-wide-web made the internet accessible for developers to build value-add products, open banking is a gateway for innovation. 

The cost and time-saving benefits to society are clear, but it does not work when payments are arbitrarily blocked in the “customer’s interest.” The level of false positives undermines open banking payments. If regulators, industry and government are serious about combating pernicious APP fraud we must confront this reality: data does not lie.

The bodies responsible for implementing open banking need to enforce it and stop the banks from arbitrarily blocking payments without rhyme, reason or recourse. Supposedly unshackled from the bureaucracy of Brussels, we must act, otherwise, the next Revolut or Wise will be built elsewhere. 

Most importantly, however, unless we unite as an industry to drive payments innovation whilst combating fraud, the party that loses out most will continue to be the consumer.

The views and opinions expressed are not necessarily those of AltFi.

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