Real-Time Inbound Payment Monitoring, Regulation, and Unintended Consequences

Read on to learn the expected unintended consequences of PSR’s policy change, a personal experience of improper inbound monitoring, and what steps banks can take to prepare.

What’s in the UK PSR’s APP Scam Policy Change 

We’re in the midst of a scams epidemic. The latest figures from the UK Finance Annual Fraud report found that UK customers experienced over 200,000 APP scam events last year. These scams resulted in £481.2M in financial losses, with only £283.2M returned to victims. 

PSR’s new policy is designed to protect consumers from the harmful effects of several different types of scams. The new rules are on track to go into effect by April 2024 and will include:

• A 50/50 liability split for sending and receiving financial organizations. 

• APP scam victims must be reimbursed in almost all cases. 

• Reimbursements to scam victims must be delivered within five business days. 

• Greater transparency into reimbursements: Banks and other financial institutions will also have to report
  • the number of APP scam claims they received
  • the share of rejected claims
  • the percentage of APP claims reimbursed
  • the time it took victims to get their reimbursement 

PRS’s new policy aims to incentivize both sending and receiving institutions to do more to prevent APP scams from taking place and reimbursing victims when they do. It could also incentivize digital FinTech firms to have more thorough onboarding controls to prevent opening accounts linked to money mules. In other words, financial institutions of all sizes will be motivated to monitor their organization’s risk exposure carefully. 

How Inbound Payment Monitoring Helps Banks Prevent Fraud Losses 

If banks don’t want to face losses for APP scam reimbursements, they must be able to detect and freeze fraudulent incoming payments. Inbound payment monitoring is one of the most effective ways for banks to reduce risk exposure. Banks can use inbound payment monitoring to carefully assess the incoming transactions coming into their accounts, not just outbound payments. If an account suddenly receives a sizable inbound payment, it could be a sign that it is involved in a money mule scheme or connected to an APP scam. 

By studying customers’ standard patterns, banks can gain a 360-degree view of their customers’ normal behaviors and determine if the transaction is suspicious. Inbound payment monitoring is critical to developing a common understanding of how customers behave and if an incoming transaction is linked to money mule activity.

4 Unintended Consequences of Enhanced Real-Time Inbound Payment Monitoring

However, it can have serious consequences if banks are too aggressive in their inbound payment monitoring. 

Last year, a family friend unexpectedly received a large payment in their business bank account. While my friend wasn’t sure why they received the payment, their bank, on the other hand, took aggressive action and froze the account, suspecting it belonged to a money mule. Not only was my friend’s business account frozen, but their personal account was also frozen.

It took roughly a week for my friend’s banking issues to resolve and their accounts to be unfrozen. But their experience is a micro view of a macro issue. Banks must realize that adherence to regulation and inbound payment monitoring has serious, unintended consequences for real-life people. These consequences include.

1. Greater Financial Exclusion

Money mules tend to fit certain profiles, whether fairly or unfairly. If bank applications become too strict, some demographics get rejected or rebuffed by financial institutions at a higher rate than others. This includes people at the lower socio-economic rung of the ladder – who are often targeted by money mule herders in the first place. If controls are too strict at the application stage, banks could unwittingly exclude a sizable population of customers from accessing vital financial services.

2. Loss of Financial Competitors

Larger banks have the resources and capital to invest in inbound payment monitoring systems and can afford to pay their half of APP scam liability. But newer financial service organizations, including FinTechs, often lack these resources and could face serious financial losses once the new PSR policy takes effect. Some businesses may fold, meaning the financial landscape will lose competitors, and consumers will have fewer choices.

3. Reputational Damages from Customer Experiences Friction

Under PSR’s new policy, banks must publicize their scam reimbursement details. This requirement means how a bank treats its customers following an APP scam will be publicly known. If banks take too long to reimburse customers or customers find their accounts blocked or frozen too often, their public image can be seriously harmed.

4. More Recklessness Attitudes Toward Scam Risks

Finally, there’s also a risk that customers may adopt a carefree attitude toward scams if they realize there’s a strong chance they will get reimbursed. After all, why should someone worry about the consequences of their actions if they are confident they will get their money back? There’s even a risk that this attitude could cause a further uptick in scam activity. Time will tell.

How Banks Can Implement Responsible Inbound Payment Monitoring

PSR’s updated policy has good intentions. But what’s that old saying about good intentions again? Let’s say it never leads precisely where you intend to go. 

Inbound payment monitoring will be a crucial priority for a financial institution when PSR’s policy goes into effect. But this regulatory change and inbound payment monitoring can result in serious unintended consequences if banks aren’t prepared. Here’s how banks can prepare to implement a mule defense program alongside inbound payment monitoring. To be clear, many banks already monitor inbound transactions for money laundering. Unfortunately, these legacy systems work in batch. This leaves insufficient time to prevent an onward transaction unless it happens in real-time.

Perform Account Risk Assessments at the Application Stage

Banks must determine whether a new account is connected to a money mule at onboarding. Unless there is concrete evidence about the applicant’s history, they shouldn’t be excluded from receiving financial services. 

Monitor for Normal Account Behaviors

Monitor the account for money mule activities if there’s still some uncertainty. For example, many mule accounts transfer money in the first three months of opening. Ensure the activity connected to the account is typical. It may include activity such as receiving direct debits from a job, shopping with a debit card, or paying bills. 

Implement Real-time Monitoring for Inbound Payments

Banks should review non-monetary information like times of transactions or other behaviors. If a large transfer is received, this could be the trigger event that confirms suspicions that an account is linked to a money mule. What’s more, transactions should be monitored in real-time. But by quickly understanding the customer, banks can know if a significant transfer is connected to a legitimate transaction (e.g., insurance payouts or a home sale) before freezing the funds or blocking the account. 

The best fraud systems add a layer of security to understand customers’ behaviors. The most significant upside of PSR’s new policy is that banks will better know their customers through real-time inbound payment monitoring. But while inbound payment monitoring promises more information and insights into customers, it can have harmful unintended consequences if banks aren’t careful. These steps will help banks prepare for PRS’s new policy while keeping financial participation opportunities open to everyone.