Across countries, across currencies
27 Nov 2024
As global demand for faster, more transparent, and international transactions increases, Clelia Frondaroli speaks to industry leaders on the implications and innovations this may lead to
Image: dilok/stock.adobe.com
Money, they say, makes the world go round. However, moving this money has come with a unique set of challenges, one which encounters geopolitical tensions and fraudulent activities on a daily basis.
As consumers move into a world governed by 24-hour availability, transactions, and the speed at which they are completed must follow suit. These real-time payments fulfil this need by providing consumers with transactions in which funds are received in 10 seconds or under. However, as innovations in the industry continue to develop and payments become faster, what threats, or frauds, await the future of instant payments, and what does this mean when transactions move across borders?
A splintering system
For Simone Leofgen, global head of payment platforms at Commerzbank, the current landscape of instant and cross-border payments reveals potential fractures on the horizon: “We’re looking at a fragmented landscape nowadays, where geopolitical influences and sanction environments impact the way we move money from A to B.”
These fractures have arguably widened over the past two to three years, where Russia’s war with Ukraine has led to the expulsion of several major Russian banks from the SWIFT network for cross-border payments. This, along with an ever-evolving and dynamic regulatory environment that spans borders, intermediaries, and jurisdictions, has meant that the complexity of instant and cross-border payments has only been heightened. Iain Armstrong, regulatory affairs practice lead at ComplyAdvantage, warns about the potential consequences of interfering with the global banking communication system and emphasises: “Whether by reforming SWIFT or diplomatic alignment, G20 leaders need to avoid the splintering of the global payments ecosystem.”
It could be argued then, that facilitating faster payments goes beyond simply interlinking systems but also means navigating regulations, regimes, and political considerations.
All about the data
Amidst this, Leofgen notes the increase in “demand and request for transparency when it comes to payments”. She continues: “This is supported by the G20 initiative on cross-border payments, with different building blocks to say we want to have faster, cheaper, and more transparent offerings to facilitate this growth for the use of consumers, but also, of course, for corporations.”
So what can be done to provide quicker, more transparent transactions in ways that circumvent the challenges posed by geopolitics?
The answer may lie in data.
Every payment, Leofgen explains, is a message with data; the newer, higher-quality, and more structured data fields are, the better the system will be able to facilitate these transactions. She continues: “A very big enabler in facilitating cross-border payments is currently the introduction of the new ISO 20022 message formats, which aims to create a standard language which enables the delivery of more structured data.”
The Federal Reserve explains the ISO 20022 system in more detail, stating that it is designed to provide “a structured and data-rich common language that is readily exchanged among corporates and banking systems,” the broad adoption of which, they say, will lead to operational efficiencies and a reduction in errors.
Introducing standardised data sources, as well as a wider data field, across banking networks therefore remains paramount to enhancing interoperability within instant and cross-border payments. As Leofgen concludes: “More data can enable smoother processing and therefore also enhance client experience, because payments are faster if they are not being stopped and validated for certain steps.”
Faster payments, accelerated threats?
However, as the clamour and demand for faster, 24-hour payments increase, the gateway for fraudulent activities, in turn, widens.
The alarm bells ring for Leofgen as the number of fraudulent schemes grows alongside the rise of instant payments: “The amount of potential fraud cases from instant payments is six times higher than it was with a traditional credit transfer. In the UK, for the Faster Payments Service, they say it’s a factor of seven.”
And the reasoning behind this?
“Some potential scams or threats that you may know from credit cards and traditional payments are now shifting to instant payments, because instant payments are final in their execution and are very fast.” Once a payment has been sent, potential recall, she warns, is nearly impossible due to the speeds at which these systems operate: “The assumption would be, once you have executed the payment, the money is gone.”
However, this does not mean fraud is inevitable with instant payments. Fraud prevention must begin before the payment is sent and validated, Leofgen emphasises, with banks implementing a series of protocols and systems designed to ensure that money is falling into the right hands.
Standard protocols may take the form of Account Name Verification, which certifies the account number the money is being sent to is linked to the correct name, whereas newly introduced systems, such as the Fraud Pattern Anomaly Detection from EBA Clearing, place “scores on payments to measure the likelihood of a fraudulent payment.” These systems, Leofgen reiterates, “really enable the detection of potentially fraudulent cases.”
She concludes: “The better your model is, the more protection you will be able to achieve.”
Piling on the pressure
How exactly, then, are criminals infiltrating payments, and what vulnerabilities are they exploiting?
Pausing for a moment to think, two key tactics come to mind for Leofgen. The WhatsApp scam, she acknowledges, remains an industry standard; the idea that a message may come through to a customer impersonating a loved one who has lost their phone and is in urgent need of money. Another, common in German markets, sees “fraudulent letters being sent out in the name of banks, pretending to the customer that he or she needs to update their system by providing a QR code.” This QR code, Leofgen warns, is then used to access the customer’s account details.
However, new threats and fraudulent schemes are created almost continuously and appear in a variety of different forms, texts, and messages. Understanding this, the schemes that are used may not be as important to know as the circumstances in which they put the victim under.
“[Criminals] create a scenario that puts somebody under pressure with the aim to divert money to a place where it’s not supposed to go.” This engineered sense of urgency, this pressure, often causes people to act in ways that jeopardise their bank account’s safety, Leofgen says.
With this, she offers a word of advice to those who may find themselves in contact with a potential scammer: “In those pressured situations, it’s helpful to use different channels, validate what you see, and step out of the situation.
Take a deep breath, and then re-evaluate the scenario.”
Different regions, different regulations
Lastly, when questioned whether regulations have impeded innovations in instant and cross-border payments, Leofgen notes that regulation and innovation often work hand-in-hand, where banks look to regulation as a standard setter: “It’s always a collaboration between the public and private sector, and that’s often driving a lot of payments innovation in Europe.”
As complexity surrounding transaction rules increases, and regional differences mean different banks will seek out different solutions, Leofgen wants to make this point clear: “I would not necessarily only call for regulation to drive innovation but also focus a lot on collaboration. We are only as strong as our network is, and we need to agree on these joint standards to make solutions scalable and easy for our customers.”
As for the future of instant and cross-border payments?
In the long term, Leofgen poses the question of interlinking payment systems: “A lot of local instant payment systems and schemes have been created. This is really the next big question; how do you interlink those instant payment regimes? How do you deal with the legal framework surrounding different systems?” For the future, however, she sees the rise of solutions using distributed ledger technology (DLT) alongside enhanced interoperability for central bank digital currency (CBDC) systems.
She continues: “The biggest advantage you always have is when you are able to process end-to-end, and it will take time to create the necessary architectures and the necessary frameworks to do so.”
In that regard, she says, when it comes to seeking new innovations in payment systems and taking the next steps in facilitating faster transactions, banks need to “start small, but think big”.
As consumers move into a world governed by 24-hour availability, transactions, and the speed at which they are completed must follow suit. These real-time payments fulfil this need by providing consumers with transactions in which funds are received in 10 seconds or under. However, as innovations in the industry continue to develop and payments become faster, what threats, or frauds, await the future of instant payments, and what does this mean when transactions move across borders?
A splintering system
For Simone Leofgen, global head of payment platforms at Commerzbank, the current landscape of instant and cross-border payments reveals potential fractures on the horizon: “We’re looking at a fragmented landscape nowadays, where geopolitical influences and sanction environments impact the way we move money from A to B.”
These fractures have arguably widened over the past two to three years, where Russia’s war with Ukraine has led to the expulsion of several major Russian banks from the SWIFT network for cross-border payments. This, along with an ever-evolving and dynamic regulatory environment that spans borders, intermediaries, and jurisdictions, has meant that the complexity of instant and cross-border payments has only been heightened. Iain Armstrong, regulatory affairs practice lead at ComplyAdvantage, warns about the potential consequences of interfering with the global banking communication system and emphasises: “Whether by reforming SWIFT or diplomatic alignment, G20 leaders need to avoid the splintering of the global payments ecosystem.”
It could be argued then, that facilitating faster payments goes beyond simply interlinking systems but also means navigating regulations, regimes, and political considerations.
All about the data
Amidst this, Leofgen notes the increase in “demand and request for transparency when it comes to payments”. She continues: “This is supported by the G20 initiative on cross-border payments, with different building blocks to say we want to have faster, cheaper, and more transparent offerings to facilitate this growth for the use of consumers, but also, of course, for corporations.”
So what can be done to provide quicker, more transparent transactions in ways that circumvent the challenges posed by geopolitics?
The answer may lie in data.
Every payment, Leofgen explains, is a message with data; the newer, higher-quality, and more structured data fields are, the better the system will be able to facilitate these transactions. She continues: “A very big enabler in facilitating cross-border payments is currently the introduction of the new ISO 20022 message formats, which aims to create a standard language which enables the delivery of more structured data.”
The Federal Reserve explains the ISO 20022 system in more detail, stating that it is designed to provide “a structured and data-rich common language that is readily exchanged among corporates and banking systems,” the broad adoption of which, they say, will lead to operational efficiencies and a reduction in errors.
Introducing standardised data sources, as well as a wider data field, across banking networks therefore remains paramount to enhancing interoperability within instant and cross-border payments. As Leofgen concludes: “More data can enable smoother processing and therefore also enhance client experience, because payments are faster if they are not being stopped and validated for certain steps.”
Faster payments, accelerated threats?
However, as the clamour and demand for faster, 24-hour payments increase, the gateway for fraudulent activities, in turn, widens.
The alarm bells ring for Leofgen as the number of fraudulent schemes grows alongside the rise of instant payments: “The amount of potential fraud cases from instant payments is six times higher than it was with a traditional credit transfer. In the UK, for the Faster Payments Service, they say it’s a factor of seven.”
And the reasoning behind this?
“Some potential scams or threats that you may know from credit cards and traditional payments are now shifting to instant payments, because instant payments are final in their execution and are very fast.” Once a payment has been sent, potential recall, she warns, is nearly impossible due to the speeds at which these systems operate: “The assumption would be, once you have executed the payment, the money is gone.”
However, this does not mean fraud is inevitable with instant payments. Fraud prevention must begin before the payment is sent and validated, Leofgen emphasises, with banks implementing a series of protocols and systems designed to ensure that money is falling into the right hands.
Standard protocols may take the form of Account Name Verification, which certifies the account number the money is being sent to is linked to the correct name, whereas newly introduced systems, such as the Fraud Pattern Anomaly Detection from EBA Clearing, place “scores on payments to measure the likelihood of a fraudulent payment.” These systems, Leofgen reiterates, “really enable the detection of potentially fraudulent cases.”
She concludes: “The better your model is, the more protection you will be able to achieve.”
Piling on the pressure
How exactly, then, are criminals infiltrating payments, and what vulnerabilities are they exploiting?
Pausing for a moment to think, two key tactics come to mind for Leofgen. The WhatsApp scam, she acknowledges, remains an industry standard; the idea that a message may come through to a customer impersonating a loved one who has lost their phone and is in urgent need of money. Another, common in German markets, sees “fraudulent letters being sent out in the name of banks, pretending to the customer that he or she needs to update their system by providing a QR code.” This QR code, Leofgen warns, is then used to access the customer’s account details.
However, new threats and fraudulent schemes are created almost continuously and appear in a variety of different forms, texts, and messages. Understanding this, the schemes that are used may not be as important to know as the circumstances in which they put the victim under.
“[Criminals] create a scenario that puts somebody under pressure with the aim to divert money to a place where it’s not supposed to go.” This engineered sense of urgency, this pressure, often causes people to act in ways that jeopardise their bank account’s safety, Leofgen says.
With this, she offers a word of advice to those who may find themselves in contact with a potential scammer: “In those pressured situations, it’s helpful to use different channels, validate what you see, and step out of the situation.
Take a deep breath, and then re-evaluate the scenario.”
Different regions, different regulations
Lastly, when questioned whether regulations have impeded innovations in instant and cross-border payments, Leofgen notes that regulation and innovation often work hand-in-hand, where banks look to regulation as a standard setter: “It’s always a collaboration between the public and private sector, and that’s often driving a lot of payments innovation in Europe.”
As complexity surrounding transaction rules increases, and regional differences mean different banks will seek out different solutions, Leofgen wants to make this point clear: “I would not necessarily only call for regulation to drive innovation but also focus a lot on collaboration. We are only as strong as our network is, and we need to agree on these joint standards to make solutions scalable and easy for our customers.”
As for the future of instant and cross-border payments?
In the long term, Leofgen poses the question of interlinking payment systems: “A lot of local instant payment systems and schemes have been created. This is really the next big question; how do you interlink those instant payment regimes? How do you deal with the legal framework surrounding different systems?” For the future, however, she sees the rise of solutions using distributed ledger technology (DLT) alongside enhanced interoperability for central bank digital currency (CBDC) systems.
She continues: “The biggest advantage you always have is when you are able to process end-to-end, and it will take time to create the necessary architectures and the necessary frameworks to do so.”
In that regard, she says, when it comes to seeking new innovations in payment systems and taking the next steps in facilitating faster transactions, banks need to “start small, but think big”.
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