In the UK, banks and payment service providers have started to apply delays of up to three days on specific transactions to combat the growing fraud rates, particularly APP scams. This sounds like a logical solution to address fraud but not one that supports the cause of Instant Payments. Faster payments must be fast and that too in a reliable way!
Let’s review whether delays in Instant Payments are indeed a possibility in Europe while waiting for the Instant Payment Regulation is still to come in.
What is Going on in the UK?
APP scams have badly affected the banking system in the UK particularly the faster payment scheme. The fraudsters have been tricking people to authorise payments directed to fraudulent accounts. The regulators in the UK are therefore being amended giving permission to banks and PSPs to delay payments for up to three days.
This extra space allows financial institutions more leeway in filtering through suspicious transactions thus acting as a buffer to prevent fraudulent transfers. This is viewed as a necessary response to growing losses from fraud for the UK banks by allowing for more in-depth transaction verification without impacting the overall financial ecosystem.
But this only works for the UK and now the question for most European banks is clear- Could-or should-the approach to delay instant payments be replicated across Europe?
Why Delays Won’t Happen in Europe: The Power of Regulation
Europe’s regulatory framework does not allow for the same delays seen in the UK and there’s a good reason for this as Europe has been waiting for instant payments for years now.
There is a growing need for the Instant Payment Regulation as the existing real-time payment systems were not homogeneous and not available in a unified way in the European Union.
Therefore, the regulation will come from the absence of Instant credit transfers as without this regulation only a few providers were offering instant payments and that too at a higher cost and in limited supply thereby leading to uneven access among different countries and financial institutions.
This undulating landscape has been a hindrance to economic growth slowed by cash flow for businesses and represented consumers waiting in vain for funds. PSPs will now have to offer instant payments affordably and reliably thereby helping the underpinning of cross-border transactions fostering financial innovation and supporting a more competitive and inclusive European payment ecosystem.
Instant Payment Regulation (IPR)- 10-second execution 365/24/7
The Instant Payment Regulation provides a 10-second execution window for payments all over Europe. This regulation is supposed to instil consumer confidence since the consumer knows that a transaction will nearly be processed in real time. Under the IPR, there is no difference between processing on a business day or a non-business day. Instant Payments will be processed 24*7 and 365 days of the year.
Imposing delays as exemplified by the UK three-day model would flatly contravene IPR’s requirement and will not be possible at all in the European context. That would defeat the purpose of regulation of itself.
The regulatory climate in Europe does not accept the concept of delays at this moment in time and places the onus upon the PSPs to incorporate fraud detection systems that may perform the two-fold requirements of security and real-time payment processing.
Fraud Prevention Without Payment Delays: The European Approach
Unlike relying on time-based delays European banks and PSPs protect transactions use advanced fraud detection technologies. Robust tools that include AI-driven behavioural analytics, real-time transaction monitoring, real-time payee verification and risk-based authentication give a comprehensive defence against fraud without interfering with the flow of payments.
It provides an ability to track and suppress fraudulent activities in real-time in a PSD2 and IPR compliant bank. It is not about delaying the transaction but analysing it in real time using machine learning models that detect patterns and anomalies which humans may miss.
The emphasis on the need to achieve more speed and security in regulations has left many European banks with no option but to innovate. Innovation creates operational resilience while at the same time ensuring that there is strict compliance with PSD2 and IPR regulations.
Call for European Banks: Fraud Prevention without Compromise on Speed
If you are working in the European financial sector, especially within fraud and compliance teams you will know the answer that Speed is an opponent of security. In the UK for instance, banks use delay in payments to counter APP fraud. In Europe, it’s your task to employ a technology-first approach that features instant payment facilitation that does not compromise proper fraud prevention.
The UK experience of APP fraud is a very precious lesson for Europe. The Confirmation of Payee was implemented only as an afterthought in its faster payments system creating a significant security gap exploited by fraudsters using APP scams. The absence of the mandatory payee verification from the onset meant that fraudsters found it easier to deceive the users into sending the payment to the fraudulent accounts.
Europe on the other hand has been more proactive in adding VoP requirements directly into the IPR. This way, payment verification is not an add-on but becomes part of the core regulation showing a more integral approach to security. It builds fraud prevention into the foundation of its instant payments infrastructure rather than adding it as a reactive measure by making VoP mandatory from the start.
This is a reflection of a much better understanding that security measures should be built into the system architecture from the start. European banks and PSPs will not have to use payment delays because they would have strong verification systems built into them from day one. Regulatory foresight gives European financial institutions the flexibility to focus on the deployment and optimisation of their VoP systems so that the payments can be fast as well as secure.
What’s the Future of Payments?
Prevention does not necessarily mean slowing down payments in Europe. Using real-time payee-verification and advanced technologies such as AI and machine learning make payments both fast and secure. Banks and PSPs should now welcome such innovations and stay one step ahead of fraudsters.
Is your organisation ready to balance speed with security as you aim to achieve compliance with Verification of Payee Instant Payment Regulation mandate?
Learn how our Verification of Payee (VOP) Product can help you embrace the future of payments and that too without compromise.
