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How the threats facing fraud teams have changed in the last year



By Mairtin O’Riada, founder and CIO at Ravelin


Despite more people drifting back to the high street now restrictions are lifting, it’s clear that the digital shift isn’t going anywhere and ecommerce is continuing to boom. Good news for online merchants, many of whom (56% from our recent survey) had already seen a positive effect on their business from Covid-19.

However, with rising digital sales comes an increase in fraud attacks, with fraudsters taking advantage of weaknesses caused by the pandemic and exploring tactics that side-step the latest 3D Secure (3DS) requirements for online payments. A significant one in five global online merchants in the same survey reported that fraud increased in 2021 and that they experienced new types of fraud the business hasn’t seen before.

So, what fraud threats do merchants need to be most wary of in 2022?


Top fraud risks to watch out for

  1. Online payment fraud

Online payment fraud continues to be the biggest threat to merchants, with 20% more businesses noticing an increase over the last year. Fraudsters just can’t seem to stop taking advantage of consumers storing card details and making payments online.

This is the most expensive risk, with global ecommerce losses to online payment fraud hitting $20 billion in 2021, a growth of over 14% YoY.

  1. Policy abuse

The costs of policy abuse can be eye-watering too. Both promotions abuse and refund abuse were rife amid the pandemic. Refund abuse is usually carried out by genuine customers taking advantage of retailer’s return policies, for example, the need for contactless delivery meant it was hard to confirm customer receipt, so many took advantage of this saying they never received items in order to get a refund.

Mairtin O’Riada

Refund abusers have also been known to return low-cost fake goods instead of genuine merchandise, and serial bulk buyers who wear outfits once for a post on Instagram and then return them perhaps don’t realise that less than half of that inventory can be resold at full-price. It’s no wonder that refund abuse rose for 60% of merchants, up from 51% in 2020.

Promotions abuse also saw a jump with 55% of merchants seeing an increase in 2021 from 49% in 2020. While generous marketing schemes can aid in beating the competition and help brands stand-out, more promotions also make for a greater opportunity for customers and fraudsters to take advantage.

It’s therefore no surprise that merchants are starting to recognise that policy abuse is an important threat and consider it as big a risk as friendly fraud.

  1. Friendly fraud

Friendly fraud (also known as first-party fraud) is on the rise for 46% of fraud and payment professionals we surveyed. This occurs when customers falsely claim chargebacks from their bank instead of the merchant, it can happen by customers genuinely misunderstanding that this isn’t the route they should take to get their money back, but less innocent customers also claim they didn’t receive the item or that it was damaged to take advantage of the system.

Refund policy terms and conditions need to be clear to avoid any confusion on processes and unnecessary disputes and refund abuse.

  1. Account takeover

Over half (55%) of merchants have seen an increase in account takeover attacks, with over a third (35%) most worried about revenue loss as a result.

Digital goods merchants were victim to the most attacks with an average of four high-level incidents per month. A huge increase in new online shopping accounts during the pandemic and the fact that digital goods can be easily resold without operational effort like organising delivery are reasons for this.

In addition, the Travel and Hospitality industry were hit hard, with account takeovers increasing to 3.3 a month in 2021 from 2.6 in 2020, with fraudsters going after dormant accounts with valuable loyalty points and frequent flying miles up for grabs.


Achieving a balance between security and happy customers

As the nature of fraud attacks evolve, the techniques and technology required to defeat them is endless, but there are steps online merchants can take.

The Payments Services Directive (PSD2) was introduced in the hopes of stimulating growth and competitiveness in the EU financial sector and addressing the rapid growth of ecommerce fraud. It introduces new standards for making payments secure such as multi-factor authentication to help combat fraud, with the latest version of 3DS enabling strong security and great customer experience to co-exist.

In fact, 90% of merchants we surveyed who are aware of PSD2’s impact believe it will be positive for these reasons. This is great news, as it is possible for merchants to strike a balance between managing risk and optimising conversion with SCA as part of PSD2.

The SCA mandate, now in effect in the UK, means savvy merchants can take advantage of exemptions for some transactions to provide a frictionless customer experience where possible when transaction risk is low. For example, merchants can prevent trusted customers with low fraud rates, regular subscriptions, or low value transactions from going through additional authentication hoops.

But at present only a quarter of fraud and payment professionals we surveyed plan to use each of the exemptions available as part of their PSD2 strategy. And just 36% of UK and Irish online merchants were sending over 40% of their transactions through 3DS in 2021. In 2022, it’s vital that merchants do take the time to segment and analyse all their customer’s payment transactions to understand the potential for exemptions.

The importance of detecting fraud faster

Importantly, however, these extra layers of identity checks don’t remove the need for fraud tools because fraudsters will continue to explore new tactics.

It’s crucial that online businesses invest in fraud tools and teams that manage fraud and payments solutions together, to maximise payment approval rates and frictionless flow from payment providers to prevent customer dropout.

Everything starts with a business’ data. The best approach is to work with a fraud detection and payment acceptance platform provider that can build a custom solution around this bespoke data to gain better control of it. With this centralised platform online merchants can then develop a deeper knowledge of customer behaviours, keep pace with evolving threats, detect fraud signals sooner and reduce the cost of fraud.



How the LEI Can Help Financial Institutions ‘Address’ a Growing Challenge in ISO 20022




The vast complexity and inconsistency of address formats globally presents significant challenges for financial institutions. In this blog, GLEIF’s Head of Business Operations, Clare Rowley, explores why the ability to map relevant address fields from Legal Entity Identifier (LEI) reference data into the ISO 20022 messaging format is a powerful means of improving data quality, helping to bolster the global fight against financial crime and promote faster, cheaper, and more transparent and inclusive cross-border transactions.

Addresses are foundational to the global economy. As noted by the Universal Postal Union, “addresses form an important part of the basic information needed to ensure communication (both digital and physical) between individuals, governments, and organizations.”

Given the fundamental role in enabling legitimate access to global commerce, incorrect, incomplete, or incongruous address information is often seen as a ‘red flag’ signaling nefarious activity within cross-border payments. The Financial Action Task Force (FATF) Recommendations, which set out a comprehensive and consistent framework of measures to combat money laundering, terrorist financing, and the financing of the proliferation of weapons of mass destruction, make this clear. Specifically, FATF Recommendation 16 aims to ensure that basic information (including address) on the originator and beneficiary of wire transfers is immediately available and included within the payment message.

Address formats and payment messages

Yet the inclusion of address information within a payment message, where every extra byte increases costs and reduces speed, presents particular and unique challenges. Address structures are wildly inconsistent across countries and jurisdictions and can be unfathomably complex, given the vast array of potential combinations. Cross-border payments compound this complexity. These transactions often involve organizations with addresses in different languages, formats, and colloquial styles.

In a bid to accommodate, payment messaging standards have favored character-limited free text lines or open fields for address information. While this approach offers a degree of flexibility (to account for the inherent variability), it also resists automation and thus inhibits straight-through processing (STP) because manual intervention is often required.

The ISO 20022 messaging standard aims to solve this problem through the introduction of highly structured, discrete, character-limited elements for specific address information, reflecting a broader drive for more consistent and structured data in payment processing to promote greater interoperability in cross-border payments and beyond.

As of today, the following address fields have been defined within ISO 20022:

  • Address Type
  • Address Line
  • Department
  • Sub Department
  • Street Name
  • Building Number
  • Building Name
  • Floor
  • Post Box
  • Room
  • Postcode
  • Town Name
  • Town Location Name
  • District Name
  • Country Sub Division
  • Country

While such highly specified address structures are undoubtedly useful in some domestic use cases where, for example, entities share the same address formats and language, cross-border payments reveal limitations.

This is hardly surprising; it would be practically impossible to provide standardized fields for every conceivable variation in physical address structures globally. To take one real-world example, an entity whose address is listed as the third floor of a building, within a golf course, close to a business park, near a ring road. Similarly, what is the practical, scalable solution for jurisdictions where street names are uncommon and addresses must be described in terms of proximity to local landmarks (i.e. 75 meters north and 50 meters east of a Church)? Add in the need to parse different languages and writing systems, and it is apparent that different organizations are not going to interpret addresses the same way.

Mapping the LEI to ISO 20022

Rather than add further structured fields in response to outliers (which stand to only contribute to further complexity), overcoming this problem requires a common, globally consistent starting point. This is especially true for the creditor address data information in cross-border payment transactions. While debtor address information can be sourced from the debtor agent’s KYC master records, the debtor interpretation of the creditor address into the ISO 20022 format is recognized as being ‘problematic’.

Happily, such a common, globally consistent starting point for address information already exists within the Legal Entity Identifier (LEI). The LEI is a 20-character, alpha-numeric code that connects to key reference data, including address information, that enables clear and unique identification of all entities participating in a financial transaction.

In comparison to the highly structured ISO 20022 address format, the LEI is more streamlined and minimally structured to account for the significant variability and flexibility. This is particularly important in the context of cross-border payments, where differences in address format are guaranteed. While this means that the format of the structured address within the LEI does not match exactly the format of the structured address within an ISO 20022 payment message, the LEI Index can be used to map LEI address data into the ISO 20022 format.

Put simply, the LEI address information should be considered compliant with ISO 20022, and relevant address fields can be retrieved from the LEI reference data in an automated manner to reduce ambiguity and enable STP.

GLEIF provides this mapping here and highlights the opportunity for financial institutions to reduce the complexity of structuring beneficiary customer information by leveraging the LEI as the organizational identifier for the beneficiary. This will “reduce the touch points and impact on clients, optimize resources and investments while enabling the bank to provide significant improvement in client experience.”

GLEIF has also received direct industry feedback from financial institutions flagging that it would be helpful and logical to leverage the LEI reference data to meet ISO 20022 requirements on customer’s address since the LEI is mandatory for most of these messages.

Supporting the global fight against financial crime

The ability to map LEI address data into the ISO 20022 format has important implications. The challenges of address validation are emblematic of an increasingly pressing need to improve data quality to bolster the global fight against financial crime. Project Aurora – an analysis by the Bank of International Settlements (BIS) Innovation Hub – identified ‘data quality and standardization of the data identifiers and fields’ contained within payment messages as key factors. This echoes the findings of the FATF, which has flagged data-sharing, data standardization, and advanced analytics as underpinning effective anti-money laundering (AML) and counter-terrorist financing (CTF) initiatives across borders.

Given this directional trend, leveraging the LEI to overcome challenges in interpreting address information stands to become a powerful way to align with emerging regulation. Looking more broadly, the LEI offers unique benefits to support globally standardized, lightweight, efficient payment messages that can be fully automated, helping to realize the promise of faster, cheaper, and more transparent and inclusive cross-border transactions.

For this reason, GLEIF has engaged extensively with various stakeholder groups across the industry on the Bank for International Settlements’ Committee on Payments and Market Infrastructures (CPMI) consultation on ISO 20022 harmonization requirements, advocating that the LEI be introduced as the identifier of the debtor/creditor in payment messages and be allocated the same status as the Business Identifier Code (BIC) regarding the substitution of name and postal address.

GLEIF has also highlighted an unmissable opportunity to consider the use of the LEI in the planned review of FATF Recommendation 16. GLEIF posits that where the originator or beneficiary is a legal entity, a trust, or any other organization that has legal capacity under national law, the LEI should be included within the information accompanying the qualifying wire transfer.

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How sound investment research can revive the City of London




Author: Neil Shah, Director at Edison Group


A few months ago, leading portfolio manager Nick Train described the modern City of London, stingingly, as a “backwater in 21st century equity markets”. The numbers seem to confirm this. Over the past five years, the number of companies listed on the FTSE 100, FTSE 250, SmallCap and Fledgling indices has fallen by 20%.

Financial centres have their ups and downs. But this is beginning to look worryingly like a trend, and it has prompted a bout of soul-searching in the City – and in Whitehall. It is now hoped that the right combination of rule changes will allow for the natural advantages of the City – talent, institutional knowledge, a first-class funding ecosystem, and the English legal system – to reassert themselves.

This was the logic behind Chancellor Jeremy Hunt’s recent ‘Mansion House’ speech, which set out a number of regulatory changes and active measures to try to reverse the decline of the City of London. Changes to listing rules were promised, as well as measures to encourage pension funds to invest in British equities. Also announced, but less often discussed, has been the Chancellor’s decision to accept all the recommendations of a review into British investment research, led by the City lawyer Rachel Kent.

But the issue is hardly secondary. It is no exaggeration to say that the current problems with the British investment research landscape are acting as a millstone around the neck of UK capital markets. The Mansion House reforms are a bold attempt to deal with these problems, and will do much to revitalise these markets, and, by extension, the City as a whole.

Misallocating capital

One major reason for the City of London’s current malaise is a dearth of investment research to inform decisions. The field has been in decline in the UK for some time: major firms have cut their investment research budgets, and coverage of UK SMEs has become particularly thin.

Insufficient investment research means that capital is allocated less efficiently. Asset managers and institutional investors remain ignorant of the opportunities, and innovative new firms are left to languish in obscurity. It is therefore little wonder why UK stocks trade at a discount of roughly 20% compared with global peers.

This represents a permanent drain on British capital markets – and on the economy at large. In this kind of investment research environment, investors are more likely to simply default to the established options known to them. Expanding firms do not get the investment they need, and investors, ultimately, – do not get optimal returns.

This also has very direct implications on the propensity of companies to list on the LSE – the decline of which has often been taken as a proxy for the decline of the City writ large. A lack of quality investment research can lead to inappropriate valuations, which pushes would-be IPOs to list elsewhere. An example of this can be found in the Turkish soda ash giant WE Soda’s recent decision to cancel its LSE IPO. According to the company, this decision was due in large part to its feeling that it had been undervalued and would therefore not be able to attract enough investment on the London exchange. This is not a perfect analogy, as WE Soda is a very prominent firm, known to all industry observers. But it does illustrate the problem. There is an impression that UK capital markets do not have the information needed to value investments correctly – and it is hurting the City.

Information unlocks investment

If the City is to start to turn things around, then the UK’s investment research sector needs to be revived. In this regard, the Mansion House reforms represent a very good start.

For one, the reforms will allow buyers of investment research to list this as part of their execution costs – a rowing back of the EU’s MiFID II rules, which still sit on the UK statute book. The reforms will also broaden retail investors’ access to research; attempt to generate issuer-sponsored research; simplify the sector’s regulations; and broaden access to research surrounding a firm’s IPO.

Interestingly, the announcement also spoke of a digital platform for investment research – almost a kind of Netflix. This would be funded by a third party of some description, with the view to securing at least three research reports by analysts for each company. This would, of course, be particularly beneficial to SMEs, which have probably had the toughest time securing analyst coverage.

These reforms will make all the difference. Broadening access to investment research will serve to drive up its quality and quantity, which will in turn increase firms’ willingness to pay for it. In an uncertain investment landscape, there is a need for trusted analysts to help investors make sound decisions with their money. These reforms significantly enhance this critical sector, helping to revive Britain’s capital markets, the City and, most important of all, the UK economy.

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