Cost, inconvenience and fraud have been increased for consumer and business users on their ‘digital payments journey’.1 Current plans for the introduction into the UK of a Central Bank Digital Currency now known as Britcoin2 and the digital euro3 will likely make things worse. In fact, the digital payments industry should clear up the various messes its services have created, in the UK and in the EU, before wider society is driven on to the next station along our ‘journey’.
Cost and inconvenience
The increased cost in the UK derives from the failed implementation of the EU Interchange Fee Regulation 751 of 2015, which should have ensured that UK merchants receive 99.8% of the sticker price of a sale of goods or services when payment is made by debit card, and 99.7% for credit card. UK merchants receive between 92% and 97%: the Regulation may as well not exist.
As for inconvenience, this is to do with lack of access to services to withdraw and deposit physical cash, to obtain a new cheque book, and to deposit cheques. The payment industry has forced users off face-to-face services and into the digital services that cost the payment industry less to deliver and yield higher revenues.
Fraud
The fraud problem is now a Europe-wide one, and is generally known as Authorised Push Payment Fraud or APPF. It relates to legislation that permits banks to process credit transfers without validating that the payee is indeed the owner of the account.4 Payee information can be a ‘Unique Identifier’ (e.g. the International Bank Account Number) and a payment provider need not reimburse if the payee behind the ‘Unique Identifier’ is different to the one named in the payment.5
High scale of APPF in the UK
Gross losses for users due to APPF in the first half of 2022 were £249 million, with £140 million reimbursed under a compensation scheme called Contingent Reimbursement Model.6 Gross losses since the start of 2020 have been £1.3 billion, of which £573 million has been reimbursed, leaving users with net losses of over £700 million over the very period during which the regulators have declared APPF to be a top priority.
EU APPF is catching up
APPF is now rising in the EU thanks to the SEPA Instant Credit Transfer Scheme.7 The scheme responds to ‘the digitalisation of the economy’, and users wanting to ‘make internet purchases anywhere and at any time’. Fraudsters like those things too.
EU policy – make instant payments ubiquitous by law and adopt failed UK fraud control
The EU now proposes a regulation to simultaneously mandate that instant payments be made available at all payment providers, and for them to implement a version of the UK’s failed control on APPF, called Confirmation of Payee or CoP.8 CoP means that users are invited to ensure that their payment provider checks that the ‘Unique Identifier’ corresponds to the payee name. In contrast with the UK system, however, ubiquitous usage of CoP will be mandatory. Then we will see if CoP really is effective or not, with users continuing to lose money to fraud in the meantime.
CoP and Contingent Reimbursement Model are a nonsense – the solution is much simpler
The digital payments industry has kicked and screamed in public about these two measures but in private they are delighted: they perpetuate the basic nonsense that a payment provider receives and accepts a payment order, does not execute it correctly, but need not be penalized for their failure.
Regrettably, the two measures exempt the industry from implementing a proper technical solution to validate the payee name against the ‘Unique Identifier’ in all cases and to return payments that fail validation.
The legal solution to APPF is simple: ensure that the payee name is part of the payer’s contract with their payment provider, and specify that this is a provision that cannot be opted out of. Put differently, withdraw the dispensation that a payment can be completed solely on the basis of a ‘Unique Identifier’. This will compel the digital payments industry to either pay for their own mess as compensation, or to resolve it via a proper technical solution.
Conclusion
Whether in the EU or the UK, the digital payments industry has created debris, and is an enthusiastic supporter of measures – like CoP and Contingent Reimbursement Model – that exempt them from fully clearing up their debris. This approach enables them to proceed quickly on to their next station, which is Central Bank Digital Currency.
Wider society should not accept this: the problems caused by digital payments in the areas of fraud, cost and inconvenience must be resolved – completely, across all of Europe, and now. Maybe if that was achieved, wider society would be prepared to consider Central Bank Digital Currency, the foray of the authorities and the digital payments industry into cryptocurrency.
1 ‘digital payments journey’: a phrase in common usage by the digital payments industry to infer progress for payment service users rather than regression
2 http://www.lyddonconsulting.com/capture-a-major-new-paper-on-the-committees-considering-a-uk-central-bank-digital-currency/
3 https://www.ecb.europa.eu/paym/digital_euro/html/index.en.html accessed on 28 November 2022
4 A credit transfer is a ‘push payment’ because it is initiated by the payer; a card payment is a ‘pull payment’ because it is initiated by the payee, through a terminal if a physical card is tendered by the payer
5 2nd EU Payment Services Directive 2366 of 2015 was transposed in the UK as the 2017 Payment Services Regulations
6 Payuk half year fraud update 2022 final_0
7 https://www.europeanpaymentscouncil.eu/what-we-do/sepa-instant-credit-transfer accessed on 28 November 2022; Faster Payments has been running for 14 years
8 https://ec.europa.eu/finance/docs/law/221026-proposal-instant-payments_en.pdf accessed on 15 November 2022
Photo by naipo.de
