In a landscape where payment fraud remains a persistent threat, recent data shows a slight decline in losses, yet new mandatory refund rules in the UK could inadvertently fuel carelessness and fraud conspiracies. With potential refunds reaching up to £415,000 per case, banks fear increased costs and moral hazards. While technology and security continue to evolve, fostering consumer vigilance is crucial to effectively combat fraud. Paul J. Davies emphasizes that bailing out victims indiscriminately could undermine efforts to deter fraudsters and maintain financial security.
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By Paul J. Davies
Payment frauds against consumers and small businesses are a huge problem, but in the UK at least the pace is slowing. Banks are fretting, however, that new rules on mandatory refunds for victims could be about to make fraud costlier. They’re right to be concerned.
The latest industry data show that education and prevention efforts by banks, payment companies and regulators are making some progress: Total losses of £1.17 billion ($1.5 billion) in 2023 were down 4% from the year before, according to UK Finance, a trade body. Still, £1 billion is a lot to lose, especially for banks that refund many of the victims. And this could become more costly because Britain’s payments regulator is introducing rules that make full reimbursement of as much as £415,000 per case a lot more likely for all victims.
The industry is worried that the new mandatory refund policy, which replaces a voluntary scheme, could make potential victims less attentive about spotting scams. Worse, with such a high payback almost guaranteed, the policy could even encourage people into conspiracies to defraud their own accounts, sharing the gains with crooked contacts. That might be an extreme risk, — but when the prize is large enough, the temptation increases.
The alternative solution offered by UK Finance — setting the cap at £85,000 instead, in line with deposit insurance limits — isn’t necessarily a good answer. It creates the same incentives, but just lowers the protections available for real victims of major fraud. Most people don’t have that much money to lose to payment frauds, but occasionally people end up with temporarily large balances, for instance when selling a house. Deposit insurance allows much higher cover in those cases when banks collapse; similar allowances for losses to scams above an £85,000 cap would also be better.
There are two kinds of payment fraud: Unauthorized, where your card or identity details are stolen, for example; and authorized, where you’re conned into handing over money or giving up key details.
Unauthorized payments are larger, with £709 million of losses last year. Better security procedures for online payments, accounts and apps is helping to reduce such fraud; about 64% of attempted unauthorized payments were stopped by banks last year, according to UK Finance, equivalent to £1.25 billion. Furthermore, the body claims 98% of successful thefts are refunded.
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Authorized payment frauds are trickier. They can involve criminals posing as banks, family members, police or regulators. Or victims can be drawn into dodgy investments, fake sales of cars or computers, or lengthy romance scams, for example. These play on people’s greed, inattention or loneliness, and can unfold over long periods of time and involve multiple payments.
In spite of education and prevention efforts, purchase and romance scams have continued to increase since UK Finance started tracking them in 2020. They also produce some of the highest individual losses: For victims who lost more than £10,000, the average romance scam cost more than £42,000 and the average purchase scam more than £46,000.
Investment scams where people are tricked into too-good-to-be-true bets on gold, crypto, carbon credits and such like produced the biggest total losses at £108 million last year, but lots more people are suckered by these so average individual losses are lower.
Refunds are typically given when victims show they took reasonable steps to ensure they weren’t being duped, although banks will deny claims if they can see their staff issued warnings to the victim about the payments they were proposing to make.
About 62% of the total £460 million in unauthorized payment frauds was refunded last year under the industry’s voluntary code, which covers most payments made by consumers but not small businesses. For high-value cases, the average refund was £25,000 compared with an average loss of about £36,000. UK Finance said it didn’t have data on the number of cases where losses would breach an £85,000 cap, but that it would likely be a small fraction of the total.
Banks obviously have to keep working hard to prevent these losses, but regulators and politicians should press for more help — and refund contributions — from internet and social media companies, too. They have a big role to play in monitoring scams and helping to trace and block crooks.
The Payment Service Regulator’s incoming mandatory reimbursement rules will put the onus on banks to prove that victims were grossly negligent in getting duped by fraudsters. The PSR said last December that this sets a deliberately high bar, and it expects only a small minority of cases won’t get a refund.
This seems too heavy handed and risks discouraging vigilance among consumers. Lots of frauds do involve high-tech methods to intercept communications, hijack email addresses or hack into apps. But there are also a lot of scams that really aren’t very sophisticated at all — just new ways to exploit ordinary human failings.
To combat financial crime, of course we need constant improvements in technology and security. But we also need everyone who uses the system to keep their wits about them. Bailing out victims regardless of their culpability is no way to keep the fraudsters at bay.
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