Embracing Confirmation and/or Verification of Payee

As the financial landscape continues to evolve, so do the mechanisms that ensure the security and efficiency of transactions. One such development is the concept of Confirmation of Payee (CoP) and Verification of Payee (VoP). Although relatively new, these schemes are gaining traction, especially with the upcoming initiatives from the Nordic Payments Council (NPC) and European Payments Council (EPC). This blog will explore the concept and scope of these schemes, discuss the opportunities and value they bring to banks, and highlight the implementation challenges and consequences for different payment formats. This is just a very short summary based on a great panel discussion that took place 11th June 2024 at Swift Connect Nordics in Stockholm that I hosted with the great of panelist, Paulina Kud?acik , Nordic Payments Council , Daniel Lexander , SEB , Georgios Sideris , Multitude and Magnus Hedenberg , Movitz Payments . The panel was followed by a presentation from Nicoline Lilletvedt , Tietoevry Banking on how she is working in shaping a Proof of Concept helping banks initiate validated payments as well as run an efficient name matching service for the beneficiary bank.

The NPC and the EPC

For those unfamiliar with the scheme-owning bodies in Europe and the Nordics, the NPC and EPC, are crucial organisations in the financial ecosystem. These member organisations for banks and Payment Service Providers (PSPs) develop and maintain payment-related schemes. Their collaborative efforts with bank representatives lead to a consensus on rules and standards, ensuring the smooth operation of various payment schemes. The CoP and VoP schemes, often synonymous with IBAN/name checks, represent the initial step in the payment process, verifying that the bank account number matches the intended payee's name before authorising the payment. This verification step is essential in preventing misdirected payments and ensuring the security of transactions.

The International Perspective

The global landscape of CoP schemes is diverse, with different jurisdictions implementing them in varying ways. Some differences are driven by regulatory forces, such as whether the actual name can be provided in the response. Others stem from a lack of best practices, such as the choice between centralized and bilateral models. This diversity poses challenges for banks striving to leverage this infrastructure to provide a consistent customer experience. Despite these challenges, the international learnings underscore the importance of improving payee validation, which enhances payment security and efficiency.

The European Context

Currently, there are different legal requirements within the EU, depending on the currency. The eurozone, for instance, must comply with the newly published Instant Payments Regulation, which mandates an IBAN/name check before all euro and instant euro transfers. The EPC's VoP scheme addresses this compliance requirement. It is anticipated that the forthcoming Payment Services Regulation (PSD3) will introduce similar requirements for all EU currencies, leading to unified rules within the next few years. Meanwhile, the Nordic PSP community, has been proactive, with a proxy service scheme in place for the regional mobile payments apps. However, that does not fully adress a validation of payee requirement and such scheme that is 24/7 and in real time in Scandinavia does not exist. With the upcoming Rix Inst service from Sveriges riksbank there is an alarming risk that fraudsters will be moving from Swish (Getswish AB) to Rix Inst.

The Value Proposition for Banks and Customers

CoP and VoP provide significant value for both customers and banks. For private individuals, these schemes simplify everyday transactions by ensuring seamless verification, as seen in netbank and Swish payment flows. For corporate customers, the emphasis is on automation, standardization, and security. Incorporating these solutions into account payables ledgers and file flows presents complexities, but the right implementation and standardization can instill confidence in the payment process. Conversely, poor implementation could lead to confusion and customer concerns.?There is also a great opportunity for banks to increase STP through improved validation processes and involve manual investigation and repair/corrections of missing or incorrect benificary information

Enhancing Payment Security with CoP

The importance of CoP services for the security of instant payments cannot be overstated. Instant payments are critical for integrating bank services with online and mobile marketplaces. However, factors like customer identification, credit scoring, transaction monitoring, and sanction list screening can slow down the process. A robust CoP solution enhances security and compliance, bringing us closer to true instant payments. Additionally, European regulators, under PSD2, require customer verification information that current solutions may not fully provide, making CoP a potential solution.

Challenges and the Need for Harmonization

Several challenges exist in adopting CoP and VoP schemes. Inconsistent solutions and rules across different markets and payment types can confuse customers. Managing "near or no match" scenarios and ensuring the central providers' speed and security can also pose risks. Harmonization across multiple schemes is vital to avoid these pitfalls and ensure a seamless customer journey.

The Customer Experience and Future Vision

The long-term benefits of CoP are substantial, likened to the revolutionary impact of Swish in Sweden. The ability to confirm beneficiary details can significantly reduce transaction costs and errors, making CoP a game-changer in payments. As these services become ubiquitous, they should ideally be invisible to customers, implemented uniformly across markets, and managed by central solutions that ensure quick and secure information exchange.

Conclusion

The adoption of Confirmation and Verification of Payee schemes marks a significant step forward in the evolution of payment security and efficiency. By addressing the challenges and leveraging the benefits, banks and PSPs can enhance the customer experience, reduce transaction costs, and ensure the security of payments. As these schemes become standardized and harmonized across jurisdictions, the future of payments looks promising, with CoP and VoP playing a pivotal role.