The Growing APP Fraud and Digital Sandbox to Prevent

Authorised Push Payment (APP) fraud, where scammers deceive individuals into sending money to accounts outside their control, continues to be a significant challenge across the UK’s financial landscape. Despite progress, with ￡341 million lost in APP scams during 2023 alone, it’s clear that more needs to be done to combat this sophisticated form of financial crime.?Digital sandbox testings can be the path to fight and prevent

As the Payment Systems Regulator (PSR) pointed out in its July 2024 report , the battle against APP fraud is evolving, with an encouraging rise in victim reimbursement. However, the complexity and sheer volume of fraud cases continue to strain existing frameworks. In 2023, a staggering 252,626 cases of APP fraud were reported, marking a 12% increase from the previous year.?

Why APP Fraud is So Challenging?

APP fraud is particularly insidious because it preys on trust. Scammers typically impersonate legitimate organisations, tricking victims into transferring funds under false pretences. Purchase scams are among the most common, accounting for 70% of cases in 2023. These involve fraudsters selling non-existent goods or services, leaving victims out of pocket. The rise in such scams has been largely fuelled by the ubiquity of online platforms. According to the PSR, online platforms play a significant role in enabling fraud, with many scams originating through social media and digital marketplaces. This highlights the urgent need for these platforms to step up their efforts in preventing fraud at the source.?

Improving Reimbursement Rates?

One of the few silver linings in the PSR’s latest findings is the increased rate of reimbursement. In 2023, 80% of reported APP fraud cases were fully or partially reimbursed, a notable improvement from 2022. Banks like Nationwide and TSB have led the reimbursement trend, implementing innovative approaches such as fraud refund guarantees and scam-checker services, which have substantially boosted their reimbursement rates. Yet, disparities remain. While Nationwide and TSB have achieved high levels of reimbursement, other banks, such as AIB, Danske and Monzo, have struggled, with the lowest reimbursement rates among the UK’s 14 largest banking groups. As the PSR prepares to launch a new mandatory reimbursement framework in October 2024, banks on both sides of the transaction - sending and receiving - will be equally liable for compensating victims. This change is expected to level the playing field and further drive up reimbursement rates.?

The Role of Technology in Fighting Fraud Technological innovation is essential in the fight against APP fraud. Banks and payment firms are increasingly turning to digital solutions to bolster their defences. From transaction monitoring that can detect suspicious activity in real-time to secure payment processing systems with built-in fraud detection, the tools to combat APP fraud are becoming more sophisticated. Artificial intelligence (AI) and machine learning (ML) are playing a growing role in preventing fraud. These technologies can analyse vast amounts of transaction data, spotting patterns that humans might miss. AI is also being used to monitor social media for impersonation attempts, a key tactic used by fraudsters. Meanwhile, stronger customer authentication methods, such as two-factor authentication and digital identity verification, are helping to ensure that only legitimate transactions go through. Encryption of sensitive data and the use of address verification systems (AVS) and card verification value (CVV) checks add additional layers of security, ensuring that even if fraudsters gain access to a victim’s payment details, they cannot easily exploit them.?

The Road Ahead?

The introduction of the new reimbursement framework in October 2024 is a critical step in shifting the burden of responsibility and ensuring that victims of APP fraud are compensated more swiftly and comprehensively. But the financial sector cannot fight this battle alone. The broader ecosystem - including online platforms, social media networks, and other entities outside the traditional payments sector - must also play their part in stopping scams before they happen. The PSR’s data highlights this need. A 32% increase in purchase scams by volume in 2023 underscores the necessity for greater collaboration between payment firms and the wider digital landscape. The forthcoming publication of scam enabler data later this year aims to shed more light on how these platforms contribute to fraud and what more can be done to prevent it.?

As the PSR and the Financial Conduct Authority (FCA) continue to push for more robust fraud prevention measures and greater transparency, the hope is that the tide will begin to turn. While the road to fully eradicating APP fraud is long, the financial industry’s increasing use of technology and stronger regulations should offer some solace to the millions of UK citizens at risk. In a world where financial scams are becoming ever more sophisticated, the key to staying one step ahead will be innovation, collaboration, and a shared commitment to protecting the public from fraud.

Collaboration with the Innovation Market: A Focus on Digital Solutions?

Recognising the scale and persistence of the problem, the Financial Conduct Authority (FCA) is actively working with the innovation market to tackle APP fraud. Two weeks ago, The City of London Corporation and the FCA organised a Showcase event demonstrating the outcomes for their year-long project exploring the role of synthetic data in combatting Authorised Push Payment (APP) Fraud.?

As was explained, the past 12 months the City of London Corporation and the FCA have worked alongside Smart Data Foundry to develop a synthetic dataset to support the development of technology solutions that can detect and defend against APP Fraud.?This dataset has been housed on the Permanent Digital Sandbox and enhanced, taking on feedback from users across the financial services and technology sectors.? "Over the past year we have seen almost 30,000 queries of the data from 36 different projects who have utilised the dataset to develop and validate their technology products."

The FCA showcased several ongoing projects in its Digital Sandbox, designed to explore new technological solutions aimed at enhancing consumer security and safeguarding the broader financial ecosystem.? These projects focus on encryption of sensitive data, a critical element in improving fraud prevention measures.?

The FCA’s sandbox provides a controlled environment where fintech firms can test cutting-edge solutions that leverage the latest advancements in data encryption, machine learning, and secure payment processing.?        

Among the notable FCA's DIgital Sandbox cases currently under review are Seiza, FinCrime Dynamics, and Verifoxx. Each of these innovators is exploring distinct approaches to fighting financial crime:??

- Seiza: The company offers a platform for real-time transaction monitoring, focusing on reducing fraud risks through advanced data analytics and machine learning.??

- FinCrime Dynamics : Specialising in the prevention of financial crime, this firm uses AI-driven models to detect fraudulent behaviour, aiming to bolster the security of financial institutions.??

- Verifoxx : A leader in digital identity verification, Verifoxx employs advanced biometric technology to ensure that sensitive transactions are conducted only by legitimate users. ?

The inclusion of such cases in the FCA’s Digital Sandbox demonstrates the regulator’s commitment to encouraging innovation and collaboration in the fight against fraud. By working with forward-thinking companies, the FCA is helping to create a more resilient financial system, where consumers and institutions alike are better protected against the growing threat of APP fraud.