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The NPP, fraud and spies (vs spies)

For as long as humans have used payment systems there has been fraud. IBM Director of Counter Fraud Management Constantin von Altrock says the two sides are likely to fight each other forever - like Antonio Prohias’ Spy vs Spy.  But there are steps the sector can take to mitigate the damage.

" You can’t just create a perfect system and [hope] nobody finds a way to work around it."
Constantin von Altrock, Director of Counter Fraud Management, IBM

Vigiliance, says von Altrock, is the single most important defence  – indeed he argues the greatest danger to global payment systems today is to believe fraud is not a massive threat.

“The greatest threat sometimes is naivety on our side,” he told BlueNotes. “You can’t just create a perfect system and [hope] nobody finds a way to work around it. Criminals are very good at finding creative ways to do it.”

The advice is vital for the Australian financial sector given the country’s proposed real-time payments network, the New Payments Platform (NPP), lacks a traditional back-stop against fraud, a centralised clearing house, requiring increased investment from banks in fraud prevention to ensure they are properly protected, he says.

For its part, the NPP is confident in its security. Australian Payments Clearing Association CEO Chris Hamilton says the platform has all the fraud prevention tools it needs – including a recognition fraud will continue to evolve and so must the system.

“The NPP is next generation thinking,” he says. “It has been designed to evolve as threat and opportunities develop in the future.”

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TAKING CARE

Von Altrock is a veteran of the sector, an inventor and designer of over 40 large-scale fraud prevention systems. He cites France’s experience with magnetic-strip EMV (Europay, MasterCard and Visa standard) cards as an example of what happens when fraud is disregarded as a threat.

Pioneered in France in the mid-1980s, the system reliably kept consumers safe for over 20 years but eventually criminals caught up. In 2013, fraud in France was among the highest in the Eurozone.

“What happened was the French stopped investing in any other systems because they thought EMV was taking care of all their problems,” von Altrock says. “And it wasn’t just card purchasing transactions. Where they were most hit was ATMs which are in theory protected by the chip.”

“The French learned the hard way just relying on one technology to keep the criminal out is just not very safe because one day the criminal will find a way to work around it.”

Hamilton says a lot of thinking on this issue and history went into the design of the NPP.

"The NPP participants have observed, and learned from, overseas experience in fraud management in real time systems,” he says.  

UNSETTLED CLEARING

Faster payments systems between financial institutions have spread throughout the world since the mid-2000s after the first system kicked off in the United Kingdom, with much success.

“What has been shown around the world is as soon as any kind of new payments approach goes into real time, it attracts the same kind of fraud we’ve had for decades in credit and debit cards,” von Altrock says.

The NPP, in conjunction with a dozen major Australian financial institutions including the big four banks, Macquarie, Bendigo & Adelaide Bank, CitiGroup and the Reserve Bank of Australia, aims to bring such a system to Australia. It’s an exciting concept for consumers but von Altrock warns it may come at a cost.

“We believe the Australian system has some different attributes which mean there are even more reasons to have good fraud prevention,” he says.

A lack of a centralised clearing house is one reason, von Altrock says. Such houses in Europe process billions transactions per year, providing many benefits including increased security. With the NPP, it’s “every bank for itself,” he says.

Hamilton says Australia has already jumped many of the hurdles European banks faced with their own systems.

“In Australia, we already have intraday direct entry payments, so bank systems are already managing fraud risk on a same-day basis,” he says.

“This was not the case overseas, where banks with overnight or even three-day batch systems were suddenly asked to process in real time, with no margin for error - and this is where problems arose."

ANZ’s NPP program director Paul Jackson says existing fraud-prevention policies at banks like ANZ will mitigate the risk from increased exposure through the NPP but adds centralised protection has been discussed.

“It’s not currently in scope for NPP launch though discussions have taken place on this with interest from participants in a future capability which is not dependent on a central clearing house,” he says.

According to von Altrock, the threat is less for Australia’s larger players such as the big four banks. Smaller banks, however, may face some tough decisions.

“There’s a danger if they don’t invest in fraud prevention from the beginning, they will be [hurt],” he says.  “If you have a central clearing house, which is doing central fraud prevention for all the members, it is easier.”

BEHIND EVERY TREE

Of course, faster payments systems are just the tip of the iceberg when it comes to the rapid evolution in payments expected over the next decade. The rise of disruptive fintechs is reshaping the market, although von Altrock says innovative incumbents can survive.

“There are some extremists views… saying payments will be taken away from the banks in the next decade,” he says with some scepticism.

Von Altock argues the strength of the start-up space is the front-end tech which makes payment systems seamless but when it comes to the back-office systems needed for processing, the infrastructure (as well as investment) is not there. In this way there will be coexistence, he says - if banks can innovate.

Otherwise, expect more successful disruptors like Qiwi which has tens of millions of active users in Russia, a place where von Altrock believes traditional banks aren’t putting up much of a fight.

“I think Australia is on the other side of the spectrum, where you have banks which are very innovative,” he says.  

The NPP is big a step in this direction as the speed it offers helps to level the playing field between disruptors and incumbents.

“Banks were at a disadvantage with old-style clearing,” von Altrock says. “Faster payment systems like the NPP are giving banks the tools they need to compete.”

When it comes to the front end it will be hard for banks to compete with the creativity of fintechs, he says. They will always be closer to customers but not everyone will last.

“If you are here in Australia, you may only see Square and Paypal and a handful of others,” von Altrock says. “But if you go to San Francisco you see a new payment group behind every tree.”

“For everyone one successful there will be tens of thousands which will die. It’s a relentless selection process and only very few will survive.” 

Shane White is senior editor at ANZ. 

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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