The role of SEPA Inst in Verification of Payee (VoP)

• Verification of Payee (VoP): this initiative helps prevent misdirected payments by ensuring that the account details provided by the payer match the payee’s details. It provides an additional layer of validation to prevent ‘authorised push payment’ (APP) fraud. In fact, a similar initiative in the UK called Confirmation of Payee led to a 17% reduction in Authorised Push Payments (APP) fraud in 2023, and in the first six months of 2023, overall fraud decreased by 2% and APP fraud decreased by 1% compared to the same period in 2022.

• Real-time fraud detection systems: banks and financial institutions are investing in AI and machine learning to analyse transaction patterns in real time. These systems can identify abnormal behaviour, flag potentially fraudulent activities, and prevent or delay the execution of suspicious payments.
• Strong Customer Authentication (SCA): required by the EU's PSD2 directive, SCA is designed to add an extra layer of protection by ensuring that customers provide two forms of authentication before completing a transaction. This helps mitigate risks such as account takeover and unauthorised payments.
• Behavioural and transactional biometrics: by analysing user behaviour (such as typing speed, navigation patterns, etc.), financial institutions can detect anomalous actions that may signal fraud attempts. These behavioural signals can trigger alerts or block transactions in real time.
• Payment blocklists and whitelists: financial institutions and payment service providers maintain blacklists (for flagged fraudulent accounts) and whitelists (for trusted payees). This helps in detecting fraud and mitigating risks associated with high-speed transactions.
• Cross-border fraud prevention cooperation: financial institutions in Europe and beyond are working together to improve global fraud detection efforts through shared information networks. One example is the European Payments Council (EPC), which collaborates with other authorities to ensure that fraud prevention technologies are consistently applied across borders.
  
  

How can SEPA Instant Payments address the challenges associated with faster payments and fraud?

SEPA Instant Payments (SCT Inst) has incorporated several features and practices that help address fraud while promoting speed:

• The introduction of VoP helps verify the payee’s details before the payment is processed. This reduces the chances of misdirected payments, a common target for fraudsters. 
• SEPA Instant Payments also allows the immediate reversal of payments in certain cases (Instant Reversal Mechanism), which helps mitigate the risks of fraud in the event of a mistaken or fraudulent transaction. 
• SEPA Instant Payments frameworks encourage banks to integrate sophisticated fraud prevention technologies that analyse transactions in real time, blocking suspicious payments or flagging them for further investigation. 
• SEPA Instant Payments enable more transparent transaction flows, allowing all involved parties (payer, payee, banks, etc.) to see the status and details of payments in real time. This transparency reduces opportunities for fraud, as it allows both sides of a transaction to check details before committing.
  
  

How is seamless communication between global payment systems ensured to improve global fraud prevention efforts?

Global communication between payment systems is vital for effective fraud prevention, and several mechanisms facilitate this:

• Interoperability standards: global payment systems work toward aligning technical standards and rulebooks to ensure that different systems can communicate effectively. SEPA Instant Payments, for instance, follows common standards like ISO 20022, which is also used by other international payment systems such as Swift and the UK’s Faster Payments.
• Cross-border data sharing: financial institutions and payment service providers are beginning to share data on fraud patterns and suspect accounts through secure networks like the European Central Bank (ECB) and European Payments Council (EPC). Initiatives like Swift GPI (Global Payments Innovation) further improve the transparency and traceability of payments.
• Collaborative fraud prevention networks: global networks like FINTRAC (Financial Transaction and Reports Analysis Centre of Canada) and INTERPOL play critical roles in tracking and preventing fraudulent activities. These organisations share data and intelligence on fraudulent schemes, which enhances the ability to detect fraud across borders.
• Upgraded authentication protocols: through the development of stronger cross-border authentication and verification mechanisms, such as the ISO 27001 cybersecurity standard, payment systems can ensure that fraud prevention measures are consistently applied no matter where a transaction originates.

In conclusion, while the speed of SEPA Instant Payments presents certain challenges, particularly concerning fraud detection and prevention, advances in real-time verification, fraud detection technologies, and cross-border cooperation offer a way forward. A holistic approach combining VoP, enhanced security protocols, and global collaboration can mitigate these risks and support the secure growth of instant payments.

About Frédéric Viard and Erez Nounou

About Bottomline