What’s the biggest thorn in the side of financial institutions worldwide? Opinions vary, but many industry leaders point to APP fraud.
Authorised push payment fraud not only erodes revenue but also drains resources and impacts profitability across the financial sector, and worryingly, it’s a growing threat. In early 2022, APP fraud made up 75% of all digital banking fraud in the United Kingdom. Later, the UK Finance’s fraud report revealed that APP fraud losses had overtaken card fraud losses, costing the nation roughly £459.7 million in 2023 alone.
It’s difficult to overstate the impact of APP fraud: devastated consumers sometimes lose their life savings as well as confidence in the system. Meanwhile, financial institutions are hit hard, haemorrhaging both significant sums and consumer trust.
Under the terms of the new APP fraud reimbursement scheme, banks must refund consumers who fall victim to push payment scams. However, according to the latest reports, regulators plan to reduce the maximum reimbursement for APP fraud from £415,000 to around £85,000 following pressure from fintechs, lenders and politicians.
As members of the Association of Foreign Exchange and Payments Companies (AFEP), we welcome this news – and we’ll explain why below.
What is APP fraud?
During an APP fraud scam, criminals manipulate consumers into sharing personal details and making payments to them, often by posing as legitimate businesses, government officials or other authority figures to gain trust.
Some APP fraud schemes are simple: scammers send texts claiming to be tax officials or bank representatives asking for urgent payments and implying grave consequences if consumers refuse to make them. Others are far more complex and involve sophisticated impersonation via AI-enhanced deepfakes.
Similarly, the amount of money lost through an APP fraud scam varies widely: some consumers lose less than £100, whereas others watch their retirement funds vanish into the ether.
What is the new APP fraud reimbursement scheme?
In June, the Payment Services Regulator (PSR) announced a mandatory reimbursement requirement for authorised push payment (APP) fraud to help combat the economic impact of APP fraud. Under the new rules, which come into force on 7 October, financial institutions must reimburse all in-scope account holders who fall victim to APP fraud.
Why do we support the compensation cap change?
Currently, the cap for APP fraud compensation sits at £415,000 – a well-intentioned but significant amount, particularly for small and medium-sized financial institutions. Larger firms may be able to shoulder the burden of expensive claims, but smaller fintechs and financial SMEs could fold under the pressure of just a few reimbursement payouts.
Known for their agility and innovation, companies in the fintech sector regularly take calculated risks. As AFEP members and advocates for SMEs, we were concerned that a high compensation cap would unduly burden smaller financial firms and deter new entrants to the market, stifling competition.
That’s why today’s reports of a reduction in the maximum reimbursement amount represent good news for boutique firms and growing businesses, which will no longer be burdened by unsustainable liabilities.
"We welcome the decision to reduce the maximum compensation cap to £85,000,” says Interpolitan Chief Executive Rishi Patel. “This aligns with our belief that protecting consumers should not come at the expense of stifling business growth.”
Focusing on sustainable fraud prevention
When it comes to fraud, including APP fraud, we believe that prevention is better than cure. A multi-faceted action plan can help fintechs combat criminal activity: robust compliance with existing regulations, improving training and implementing enhanced security features can all help reduce risk.
“We must prioritise investment in security and fraud prevention measures to ensure a safer financial environment for all,” says Patel, pointing out the merits of a balanced approach to consumer protection.
Interpolitan Head of Compliance Jack Miles agrees, highlighting the critical role of compliance in preventing fraud. "Reducing the compensation limit is a sensible move,” he says, “but it should be accompanied by stringent compliance frameworks that prevent fraud from occurring in the first place.”
Financial companies must also collaborate with consumers to reduce fraud by teaching them how to spot and avoid scams. Advanced security measures like multi-factor authentication and real-time transaction monitoring can further reduce the risk of APP fraud.
Moving into the future
While yesterday’s announcement is a step in the right direction, consultation on the reimbursement cap has yet to conclude. We plan to continue advocating for small and medium-sized financial businesses as the decision-making process continues, helping ensure a fair and equitable outcome for both consumers and the businesses they rely upon.
To learn more about Interpolitan or open an account, get in touch with us today.
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