Payment fraud poses a significant challenge globally, with fraudsters constantly evolving their tactics to exploit weak points in the payment ecosystem. In response, the European Union (EU) has proposed updates to its regulatory framework for payments, including a new Payment Services Regulation (PSR). While the intention to reduce payment fraud is universally supported within the digital, telecom, and payment sectors, the shared liability regime proposed by the European Parliament risks being counterproductive. This article outlines the potential pitfalls of this approach and suggests alternative solutions to address payment fraud without unintended negative consequences.
The Current and Emerging Threats of Payment Fraud
The EU’s existing payment regulations have managed to mitigate basic forms of fraud, such as unauthorized use of stolen card details. However, fraudsters have adapted their methods, moving towards more sophisticated tactics like Authorised Push Payment (APP) scams. In these scenarios, users are tricked into authorizing payments to accounts controlled by fraudsters. Common tactics include impersonating trusted institutions or individuals to convince consumers that their bank accounts are compromised or exploiting personal relationships through romance scams.
APP fraud is particularly challenging to combat due to its multi-faceted nature. Fraudsters often exploit gaps across various sectors, including banking, telecoms, and online platforms, and use multiple communication channels to perpetrate their schemes. Effectively tackling such fraud necessitates a coordinated, cross-sectoral approach built on trust, cooperation, and education. The EU Commission initially proposed that payment service providers be held liable when fraudsters impersonate their employees to trick users into approving payments. However, Members of the European Parliament (MEPs) have proposed changes that extend fraud liability to online platforms and telecom operators, requiring them to reimburse fraud victims and cover a broader range of scams.
Risks of the Shared Liability Regime from the European Parliament
Three recent studies underscore the risks associated with the shared liability regime proposed by Parliament. These studies provide valuable insights and potential fixes to avoid the adverse effects of this approach. The Copenhagen Economics Study warns that shifting liability between banks, telecom operators, and online platforms would undermine essential cooperation needed to combat fraud. It found that businesses already invest substantially in fraud prevention to maintain user trust and adhere to existing regulations. Extending liability could foster a culture of blame-shifting rather than collaboration, crucial for effectively addressing fraud.
The European Centre for International Political Economy (ECIPE) Policy Brief points to the legal incoherence of a shared liability regime, indicating potential conflicts with existing EU regulations, such as the Digital Services Act (DSA) and the ePrivacy Directive. It highlights that shared liability could create confusion for businesses and consumers by conflicting with data protection, content moderation, and responsibilities rules for online platforms and telecom companies. Policy Expert Zach Meyers’s research argues that the proposed liability rules could create a “new ‘honeypot’ for scammers,” as guarantees of reimbursement would likely increase fraud incidents. Countries that introduced mandatory reimbursement schemes, such as the United Kingdom, observed a spike in fraud rates due to fraudulent claims and blame-shifting incentivizing fraudsters.
The Importance of Trust and Cooperation
Shared liability rules are likely to introduce significant challenges. Trust and information-sharing between banks, telecom firms, and online platforms are crucial for detecting and preventing fraud. Shared liability rules, however, could lead to over-reporting and defensive practices, where entities focus more on self-protection instead of proactive fraud prevention.
Additionally, fraudulent actors might exploit reimbursement schemes, and users could become less vigilant, expecting compensation regardless of their actions. Ultimately, the costs of mandatory reimbursement would likely be passed on to consumers through higher fees or reduced service quality. Trust remains a cornerstone in combating fraud, and it is imperative that policies enhance rather than erode this essential foundation.
Towards a Smarter Approach to Combating Payment Fraud
To effectively combat payment fraud, EU policymakers should consider alternative approaches that address the core issues hampering cross-sector cooperation. One significant barrier is data-sharing restrictions under the General Data Protection Regulation (GDPR). Alleviating these restrictions could enhance collaboration and information exchange between sectors. Promoting voluntary cross-industry initiatives, such as the Tech Against Scams coalition, could further bolster efforts to fight fraud by enabling stakeholders to share best practices and intelligence.
Strengthening consumer education is another critical step. Investing in awareness campaigns to help consumers recognize and avoid scams has proven effective. Empowering consumers with tools like transaction warnings and fraud-reporting mechanisms integrated into banking apps and online platforms can further enhance their vigilance. Success in combating fraud will be highly dependent on the informed awareness of the end users.
Adopting Technology-Neutral and Outcome-Focused Regulations
Global payment fraud presents a significant challenge, with fraudsters continually adapting their strategies to exploit weaknesses in the payment ecosystem. In response, the European Union (EU) has proposed updates to its regulatory framework for payments, including the introduction of a new Payment Services Regulation (PSR). While the goal of reducing payment fraud is widely supported across digital, telecom, and payment sectors, the shared liability regime suggested by the European Parliament may prove counterproductive. This article examines the potential drawbacks of this approach and offers alternative solutions to combat payment fraud without producing unintended negative outcomes. It is crucial to remain vigilant and innovative in developing fraud prevention strategies that protect consumers and businesses alike. Effective collaboration between regulators and industry stakeholders is essential to create a balanced framework that promotes security while allowing for growth and innovation in the payment sector. Through thoughtful regulation, we can work towards a payment ecosystem that is both secure and efficient.
