In today’s digital age, the fraud industry has gained an unprecedented role in our payment systems. Yes, you read that correctly. It’s an industry, a powerful and extremely profitable one that keeps evolving and getting more sophisticated. The phenomenon of payment fraud knows no borders and is a pressing issue for most countries worldwide, as our members and the OECD report.
The harm for consumers is huge. According to the European Banking Authority, consumers lose €2,252 on average for this type of fraud.
Given this alarming amount, you might wonder: who ultimately covers the expenses? Consumers bear 79% of the losses! This is because they are often considered “grossly negligent” by the banking sector, while they were lured by very sophisticated tricks into paying.
What’s more, when consumers authorised the payment themselves (e.g., making a bank transfer to someone pretending to be a family member), they cannot get reimbursed under the current system, even if that authorisation was induced by fraud. This needs to change.
AI is making fraud harder to detect
Rapid digitalisation has been one of the main causes of the significant increase in fraud. To make matters more complex, Artificial Intelligence (AI) is offering new opportunities for criminals. Their tactics are becoming more convincing, fast, and on a larger scale, making detection challenging even for tech-savvy consumers.
Above: AI is making fraud increasingly hard to detect
As per a Europol report, AI is unfortunately an extremely useful tool for impersonating an individual or organisation. By reproducing specific speech styles, criminals mislead victims to gain their trust, succeeding in phishing and online fraud, that according to Europol “are already worryingly sophisticated”.
Fraud victims and psychological manipulation
Contrary to the common belief that only the elderly and digitally illiterate fall victim to scams, surprisingly, the younger demographic is actually the most targeted group. According to data from Spain, most victims are between 26 and 40 years old. This is due to their extensive online presence, coupled with limited experience in finance and high confidence in the digital environment.
On top of deepfake techniques, psychological methods are also exploited to manipulate people into making payments under false pretences. A study by BEUC’s British member Which? reveals that most scams occur when victims are emotionally vulnerable (e.g., in situations of stress, fatigue, or distraction). Fraudsters create an overwhelming sense of urgency, they put victims under pressure, and they manipulate them throughout the process to overcome doubts or external obstacles in a hurry.
Are consumers less vigilant if they get reimbursed?
Beyond financial costs, there are other important losses that are hard to measure. These include emotional strain, stress, the time invested in reporting it and trying to get their money back or even lack of access to money (going into overdraft due to the scam). These losses may not have a clear numerical value, but they are highly significant, harming the (financial) well-being of consumers and undermining trust in financial institutions and the financial system.
No one wants to lose their money to fraudsters
We often hear that if consumers are reimbursed for fraud losses, there is a risk of ‘moral hazard’. In other words, that they become careless with their spending. However, there is evidence contradicting this assumption. No one wants to lose their money to fraudsters and deal with the administrative and psychological hassle to reclaim it. Take, for instance, the case of the British bank TSB, which implemented systematic reimbursement for fraud cases in 2019. Despite reimbursing in 98% of cases, TSB observed not only a lack of moral hazard behaviour but also reduced fraud losses compared to industry averages.
Prevention is better than a cure
This came as no surprise to us. With systematic reimbursement in place, Payment Service Providers (PSPs) have a monetary incentive to invest in fraud prevention measures. Subsequently, this incentive should be extended to other actors (e.g., telecommunication providers and online platforms) which should be liable towards PSPs if the fraud originates on their platforms.
Above: with systematic reimbursement, PSPs have an incentive to prevent fraud
Time for systemic solutions!
Payment fraud is a systemic problem that demands systemic solutions. More effective prevention measures to tackle fraud are required, as financial education and awareness alone cannot address the issue, also linked to the increased sophistication of the fraud, and the deepfakes. It is not feasible for consumers to keep up with the fast-evolving threats. We need a comprehensive approach beyond individual consumer responsibility.
More effective prevention measures to tackle fraud are required
With the Payment Services Regulation currently under negotiation between EU lawmakers, and in view of the current circumstances, it is urgent to adapt the system to the evolving nature of fraud. Obliging PSPs and online platforms to reimburse consumers would financially incentivise them to invest in fraud prevention and ensure fair treatment of victims.
Finally, this should also be paired with better law enforcement to ensure that all actors implement fraud prevention measures and to increase confidence in digital payment systems.