Could Open Banking technology have prevented Covid loan fraud?

The lack of checks for Bounce Back Loans identified by the Government watchdog could have been reduced by existing Open Banking technology.

The scale of the estimated £5bn of fraudulent Bounce Back Loan claims is both understandable and frustrating. It’s understandable because the scheme was created and administered under rapid timescales amid a time of unprecedented global crisis. But it’s also frustrating given that a system exists that might have been used to verify claimants in an efficient and secure way before any loans were paid. That system is Open Banking.

If this had been employed at the outset of this scheme, the levels of fraud could have been mitigated. Reading the National Audit Office (NAO) report, this frustration is compounded given that the Government’s counter-fraud measures were “implemented too slowly to be effective” and its activity to limit taxpayers’ exposure to fraudulent loans was deemed “inadequate”.

More haste less speed

At the height of the first coronavirus lockdown, time was understandably of the essence. The economy had been mothballed, and hundreds of thousands of small businesses were hanging by a thread, desperate for a financial lifeline to save them from extinction.

This environment led to a situation where checks and balances were relaxed; the Government was putting pressure on banks and building societies to distribute Bounce Back Loans of up to £50,000 or 25 per cent of annual turnover quickly, and the risk for financial institutions was low due to a Government guarantee of 80 per cent. As the scheme progressed, countering fraud was taken more seriously with 13 additional measures put in place. Yet these came too late to prevent fraud under the scheme, and were only focused on detection rather than prevention.

But rather than “limited verification” and “no credit checks on borrowers”, as the NAO discovered, the institutions handing out these loans – of which 1.5 million were made, totalling £47 billion - could have used a simple Open Banking consent to validate applicants. Open Banking can instantly check the full details of a bank account using an almost entirely fraud-proof process. This could have been cheaply and quickly utilised to verify if an account was genuine before a loan was given out.

A robust and effective system to counter fraud

By implementing Open Banking, fraud checks are rapid because the person trying to take out the loan does not need to submit any details. Instead, they simply have to provide a fingerprint or face scan via their bank app to verify their identity while proving that a.) their account is genuine and b.) any stated account details or activity are independently verified by the bank. 

Not only is this process secure, it also reduces the chance of human error such as banks or building societies accidentally paying Bounce Back Loans into the wrong accounts. 

An Open Banking consent provides an efficient verification check while informing the bank about an applicant’s account activity, providing answers to key questions such as: how long has the account been active before the loan was applied for and when was it opened? Has it been blocked in the past? Does the applicant’s name match their bank account’s name? Are the stated income or expense details verified by the bank’s own data?

HMRC is a trailblazer when it comes to Open Banking, meaning that other government departments can use Ecospend to follow the taxman’s lead if they require a more sophisticated and cost-effective anti-fraud strategy. HMRC already uses Pay-by-Bank, the world’s largest Open Banking use case date, powered by Ecospend. Since March 2021, Pay-by-Bank technology has enhanced the tax payment journey while initiating over £4bn in collections. In addition to savings on card fees, due to there being no manual data entry at the point of payment, there have been no misallocated funds either.

The use of Open Banking technology is also being increasingly employed by many other sectors too, with early adopters receiving instant account to account payments, thus reducing processing costs, increasing collection rates, and providing a more streamlined and efficient payment framework for customers.

Open Banking is rewriting the rules

Open Banking can help both Government and the banking industry work more closely together on a range of important challenges and opportunities, from combating illicit financial transactions to identifying material risk exposures across institutions, and developing more personalised financial advice and products. Utilising these measures in future schemes could help to avoid a repeat of the high levels of fraud seen under the Government’s Bounce Back Loans programme.

The World Economic Forum says that privacy-enhancing techniques, such as differential privacy (where noise is added to a dataset to make it impossible to reverse engineer) and zero-knowledge proofs (where users can prove their knowledge of a value without revealing the value itself), open a “range of possibilities for enhanced risk management and financial innovation with benefits for customers, regulators and financial institutions alike”. Ecospend enjoys a privileged position at the forefront of this technology. 

As such, the Government can look to UK Fintechs to move beyond traditional approaches to problems. It can now consider innovative new technologies to reduce cost and harm to consumers and businesses alike, even in high-pressure situations such as those faced when developing the Bounce Back Loan Scheme.

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