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Payment Fraud on the Rise

Sopra Banking Software's externally written reports with analyst firms

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Payment Fraud on the Rise — Time to Get Smart Questions posed by: Sopra Banking Software Answers by: Tom Zink, Research Director, IDC Q. What is the current cost of payment fraud to banks? There's no simple answer to this question, given the many different types of payment fraud, payment types, differences across countries, and the fact that banks are not carrying the full cost of fraud. It's also true that the real level of fraud is much higher because not all fraudulent transactions are reported, particularly for non-card-related fraud. Unfortunately, the latest data published by the ECB is from 2018, so we are yet to see the impact of the rapid rise in digital payments during the pandemic. In the SEPA area, fraud accounted for 0.037% of the total value of card transactions — which means for every €100 spent on cards, 3.7 cents was lost to fraud in 2018. All in all, this ramps up to €1.8 billion in card fraud. Card-not-present (CNP) fraud accounted for 79%, while fraud at the point of sale (POS) only accounts for 15%. In France, the share of fraud was even higher — almost double the SEPA average, at 0.069%. I can only speculate about the reasons for this, but the generally higher usage of card payments in markets like the U.K. and France may be the simple reason. I expect these numbers to go up significantly for 2020 and 2021. More people used electronic payments than ever before, as cash was increasingly frowned upon due to the perceived contagion risk and the extended lockdowns. This forced many consumers into ecommerce; particularly for those with less experience of ecommerce, this created huge opportunities for fraudsters. With the cost of fraud on the rise as digital payments accelerate, banks and payment processors will be hard pressed to develop scalable and effective ways to counter an increasingly sophisticated, innovative, and agile foe. New technologies — such as artificial intelligence and machine learning to identify suspicious behaviors and patterns, transaction risk analysis, and convenient yet secure authentication through biometrics — will be key to keep pace with bad actors. Q. Managing fraud has always been a challenge in payments, but the rapid pace of payments transformation in combination with the new, digital reality has raised the bar for the industry. What are the key challenges brought by digitalization of payments? The biggest challenge I see is getting the balance right between simple, frictionless payment experiences and security and antifraud. I remember the days when banks took a certain level of payment fraud as the cost of doing business. Today, the industry — driven by regulators — had been forced into a "catch 22" situation between great customer experience and zero fraud.

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