The Contingent Reimbursement Model is a UK payments industry initiative designed to compensate victims of authorised push payment fraud (APP fraud). Over the past few years, there has been a steady stream of reports of APP fraud — this is where fraudsters use social engineering techniques to trick people or representatives of businesses to send money to them. UK Finance reported almost 85,000 cases in 2018, an increase of 44% over the previous year.
This crime has been facilitated by the advent and popularity of UK Faster Payments; we all appreciate the ability to send money instantly – that includes fraudsters. Until recently the liability for losses from these scams was generally set by the victim’s bank; with no uniform rules, the bank could decide to reimburse the customer or not. Frequently the customer was the one left with a hole in their finances. As the Which Super Complaint points out, with APP fraud UK consumers and businesses have been left unprotected, compared to other payment methods. Banks have given customers the ability to make real-time, irrevocable payments but have not given them protection if something goes wrong.
The Contingent Reimbursement Model is one way that the industry is seeking to redress the balance. It lays out the circumstances in which people who have been tricked can claim their losses back from their bank. Given the possibility of first-party fraud, including collusion between account holders and criminals, this is not an automatic process but one that allows banks to refuse to reimburse if there is evidence of negligence or fraud. It seems like a reasonable solution; those banks that sign up to it will avoid the lurid headlines about customers they have not supported, and victims don’t lose life-changing sums to fraudsters.
Why the Model Is Being Challenged
The furore over the Contingent Reimbursement Model has arisen because banks must decide how to pay for it and that has proven difficult. Currently there is a standoff — it even looks likely that there will be no funding for it from the end of 2019.
So why can’t banks agree on how to fund this initiative?
The proposed plan was that there would be a levy of a few pence on each Faster Payment made. Some banks don’t agree with this because:
- As a flat rate, the same fee applies whether a transaction is for £25 or £250,000. Those institutions that send large volumes of low-value payments feel that they will disproportionately pay for the fund.
- The fee applies irrespective of what other measures a financial institution has taken to stop APP fraud. Those that use transactional analysis, improve customer education or implement confirmation of payee to help prevent it may feel they are subsidising those that don’t.
It is easy to see why some banks may feel the proposed funding model is unfair, but to date they don’t appear to have a workable alternative.
This needs to be viewed in the context of the move to a regime of mandatory PSD2 strong customer authentication. Fraudsters will be looking for an opportunity where SCA doesn’t stop them, and APP fraud may become even more attractive to them.
The Contingent Reimbursement Model is still an opportunity for the banks to get their house in order without regulatory involvement. A lack of meaningful action by the banking community, coupled with a rapidly increasing number of victims, may be a red flag to the regulators that they need to step in and take control.