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The first line of defence for fraud: Knowledge

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By Oleg Stefanets, Chief Risk Officer, payabl.

 

Online shopping is thriving, with retail sales equating to nearly $5 trillion in 2021. For merchants, this presents huge opportunities in the eCommerce space. However, alongside the rise of online shopping comes an increase in fraud, with over £1.3 billion stolen by criminals through authorised and unauthorised payments fraud last year alone.

With this increase in fraud, eCommerce merchants in particular need specialised payment security measures. Growing risks could result in losses both in terms of profit and consumer confidence – two business-critical priorities. The frustration of losing profit to fraudulent activity is enormous, and as customers value trust and credibility, businesses cannot afford to let fraud go undetected. Fraud should be a key priority for any business, and merchants must take the necessary steps to address and fight it. But, how do businesses protect themselves against fraudulent transactions?

 

The Covid effect: The rise of fraud

The pandemic has undoubtedly changed consumers spending behaviours, as many people were forced to rely on online shopping. In fact, online spending grew by 35% in the US in 2021 compared to 2020, accelerating the shift towards a more digital world. Following the increase in online spending, fraudsters found a huge opportunity to leverage online sales for payment scams and data theft.

 

Oleg Stefanets

Convenience vs security

Payment technology can make life more convenient, enabling instant purchases, but it can also raise concerns about fraud and how to balance the desire for convenience without sacrificing security. While consumers expect a certain level of protection from a business, they also value convenience. It’s therefore important for businesses to remember that not everything can be done in the back end. Businesses need to adopt payment types offering the best of both worlds, such as PayPal or Apple Wallet, while embedding back-end protection such as double-shield.

Double-shield protection fights against fraudulent activity through technology such as 3D secure 2.0, verifying that the card user is the legitimate holder of the card, enhancing the security even further. Although this tactic will impact the customer, it won’t cause major delays and shows a brand’s clear commitment to fraud prevention, enhancing its reputation with customers.

In addition, merchants should incorporate pre-authorisation proactively. By ensuring that the customer’s funds are held for a few days, retailers can lower the risks of chargebacks caused by fraudsters. Although there is an initial delay in the payment, it enables greater customer protection.

 

How to protect your business

There are a wide variety of tactics that businesses can adopt to prevent fraud. It’s a challenging and complex landscape to navigate. Here are my top tips every merchant can take:

  • One simple but effective way to prevent fraudsters from successfully targeting you is by including the company name on all statements and invoices. This makes it easier for customers to recognise the transaction on credit card statements and less likely to dispute the charge.
  • Another type of fraud is confusingly called friendly fraud and is said to be the most difficult to prevent. It is where fraudsters manipulate a system put in place for security. In this case, cardholders may be confused or misguided regarding a recent purchase and request a refund from the merchant. Friendly fraud is often tricky to resolve as consumers willfully avoid paying for a product or service already delivered or genuinely forget that a purchase was made.

The best way to prevent friendly fraud is to verify the purchase by calling the customer. Having tracking and shipping processes in place is another way to ensure the customers receive their orders and make it easy for them to contact you about inquiries and complaints. Merchants can also prevent this fraud by keeping detailed records, delivering great customer service, and blocking repeat offenders.

  • Monitoring patterns in consumers’ online orders is another way to detect unauthorised purchases. For example, if a customer appears to make purchases through a single IP address using multiple card numbers it could be a sign of fraud. However, depending on the size of the business, this kind of ‘manual’ monitoring can be challenging. This is where specialised software or risk management tools can help automate the process.
  • Fraud can spell disaster for a business, and it should be in everyone’s interest to play their part in detecting the red flags. Thankfully, various fraud management tools, including artificial intelligence features in detection, are available to online merchants to integrate into a payment platform. 3D Secure, for example, is used to prove that the card user is the legitimate card owner. Geo-location is another tool using the customer’s location and connection data to authenticate their identity without compromising their privacy.

 

Education is key

While technology plays a crucial role in fighting fraud, consumer education is key to prevention. After all, fraudsters always attack the weakest link – the consumer. Educating consumers on keeping their data safe is equally important as having all the right prevention measures in place. We now have an entire generation brought up online compared to previous generations. Even though most of the UK is digitally engaged, increased exposure to fraud can catch even the most tech-savvy Millenials and Gen-Z. Providing good customer experiences isn’t just about helping customers who are already victims of fraud; it is about communicating and supporting customers through their shopping experience.

The pandemic set the perfect stage for fraudsters to take advantage of and exploit consumers’ vulnerabilities. As uncertainty has become the new normal in a post-pandemic world, educating and protecting customers from fraud is more important than ever. It offers an opportunity to further develop and strengthen customer relationships by providing thoughtful, secure, customer-centric solutions and advice that enable a smooth customer experience while protecting the business.

Business

CBDCs: the key to transform cross-border payments

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Dr. Ruth Wandhöfer, Board Director at RTGS.global

 

If you work in finance, you’ll have been hearing a lot about central bank digital currencies (CBDCs) and the moves different markets are making towards using, regulating and evaluating the viability of moving to an economy based on digital currency.

We are already seeing progress in the research, piloting and introduction of CBDCs into the financial system. The Banque de France for example, recently launched its second phase of CBDC experiments in line with the “triple digital revolution” unfolding in the financial sector. The infrastructures of financial markets and fintechs, however, are not prepared to accommodate their security, stability, and viability.

This could be an issue in the not too distant future. Each year, global corporates move nearly $23.5 trillion between countries, equivalent to about 25% of global GDP. This requires them to use wholesale cross-border payment processes, which remain suboptimal from a cost, speed, and transparency perspective. In fact, the G20 cross-border payments programme considers improving access to domestic payment systems that settle in central bank money, as one of the key components in facilitating increased speed and reducing the costs of cross-border payments.

The current state of cross-border payments

International transactions based on fiat are currently slow, expensive, and highly risky due to today’s disconnected financial infrastructure, messaging, and liquidity. Wholesale cross-border payment settlement can take 48 hours or longer, which is not practical in today’s digital world. Even if not every market moves to CBDCs, in an increasingly digital era, cross-border settlements between central banks will unavoidably involve dealing with CBDCs. So, not only will we have different currencies, we’ll have different technical forms of currency being exchanged – digital and fiat – as markets adopt CBDCs at different rates, adding another layer of complexity to cross-border settlements.

While there is much anticipation about the opportunities CBDCs can bring, the adoption of this technology will only be widespread if payment and settlement capabilities are overhauled to allow for new innovations in currencies.  This need for transformation represents an opportunity to redesign existing infrastructure to support cross-border CBDC transactions.

The current cross-border payments system involves correspondent banks in different jurisdictions using commercial bank money. Uncommitted credit lines used in cross-border transactions are a potential risk for any bank that relies on credit provided by a foreign correspondent bank. Interestingly, there is no single global payment and settlement system, only a complicated network of interbank relationships operating on mutual trust. While trust has allowed financial systems to function smoothly, when it begins to fail, as it did during the 2008 financial crisis, the result can be catastrophic.

Following the crisis, the Bank for International Settlements (BIS) implemented the Basel III agreement, which required banks to maintain additional capital against correspondent banking account exposures. These risk-weighted assets impose a costly capital charge on positions held by banks at other banks under correspondent arrangements. While this framework helps combat risk, it neglects to address the inherent problems in traditional correspondent banking that contribute to these risks.

Making the case for CBDCs

CBDCs can offer an improvement in settlement risks and are certainly thought to have potential benefits by the BIS. If implemented correctly, wholesale CBDCs can indeed accelerate interbank transactions while eliminating settlement risk. They can also encourage a more efficient and straightforward method of executing cross-border payments by reducing the number of intermediaries.

It is likely the evolution towards CBDCs will initially see the financial market supplement rather than replace existing payment instruments with new types of digital currency. CBDCs will coexist with current forms of money in a wholesale context, and their payment rails will also work alongside the existing payment systems. In simple terms, CBDCs will need to be linked to the broader capital markets ecosystem and applications such as securities settlement, funding, and liquidity.

If built with an innovation-first mindset, the future of banking infrastructure should provide full interoperability and convertibility between fiat, CBDCs, and any other type of digital money used in wholesale payments.

The future of CBDCs

To unlock the full potential of CBDCs, a ‘corridor network’ will need to be formed. This involves combining multiple wholesale CDBCs into a single, interoperable network under common governance agreed upon by all central banks involved. The legal framework of this platform would then allow for payment versus payment (PvP) or, where applicable, delivery versus payment settlement.

Practical wholesale CBDCs appear to be on the horizon, either as a supplement to existing financial systems or as part of a transition to a digital, cashless world. Looking ahead, central banks would benefit from collaborating with fintechs that provide innovative cloud native technology to enable seamless wholesale cross-border payments without interfering with the flow of funds. If wholesale CBDCs are to become a reality, fintechs must be prepared to accommodate them.

 

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Green growth: The unstoppable rise of climate technology investment

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With the investment community focusing more and more on renewable technologies, investor interest is at an all-time high. Ian Thomas, managing director, Turquoise, reviews the current investment landscape and highlights the opportunities for investors keen to capitalise on this growing trend.

Green, or climate, finance is a label for providers of finance who are supporting investments seeking positive environmental impact. The label covers investments in green infrastructure, venture capital investment in clean technologies and renewable energy. Green finance has grown by leaps and bounds in recent years, supporting public wellbeing and social equity while reducing environmental risks and improving ecological integrity.

Worldwide, energy investment is forecast to increase by 8% in 2022 to $2.4 trillion, according to a new report by the International Energy Agency, with the expected rise coming mostly from clean energy – $1.4 trillion in total. To put this rocketing figure into some perspective, clean energy investment only rose by 2% annually in the five years following the signing of the Paris Agreement in 2015. Energy transition investment has some way to go, however – between 2022 and 2025, to get on track for global net zero, it must rise by three times the current amount to average $2,063 billion. [1]

Turquoise has been active for almost 20 years as a venture capital investor and adviser to companies in the climate technology space that are raising capital and/or selling their business to a strategic acquirer. Reviewing current industry investment news, as well as drawing on examples from the portfolio of Low Carbon Innovation Fund 2 (LCIF2), managed by Turquoise, I have commented below the latest on the renewable energy trends most piquing investor interest.

 

Solar PV

Renewable power is leading the charge when it comes to investment, with wind energy and solar PV emerging as the cheapest option for new power generation across many countries, and now accounting for more than 80% of total power sector investment. Solar power is responsible for half of new investment in renewable power, with spending divided roughly equally between utility scale projects and distributed solar PV systems.

This huge increase in solar spending, which continues in spite of supply chain issues affecting raw material delivery, has been driven by Asia, largely China (BloombergNEF, 2022). Meanwhile, Europe is re-doubling its efforts to achieve an energy transition away from Russian gas and other fossil fuels, building on investment that was already rising steadily prior to the outbreak of war in Ukraine. Germany, the UK, France and Spain all exceeded $10 billion on low-carbon spending in 2021.[2]

 

Wind

Last year was a record year for offshore wind deployment with more than 20GW commissioned, accounting for approximately $40 billion in investment. The first half of 2022 saw $32 billion invested in offshore wind, 52% more than in the same period in 2021 (BloombergNEF, 2022). Taking into account also onshore wind, in 2021 investment was spearheaded by China, followed by the US and Brazil.[3]

In the UK, suggested targets include plans to host 50GW of offshore wind capacity, as well as 10GW of green and blue hydrogen production, by 2030. Investors will naturally be encouraged by proposals to simplify the planning process across the board for renewable projects.[4] France and Germany have also increased their offshore wind targets, signalling further support for investment.

 

Decarbonising housing: the business opportunity

The need to decarbonise residential housing, made all the more urgent by current energy prices, also offers substantial scope for investment. The gas price spike is naturally increasing interest in technology such as electric heat pumps, which had already enjoyed 15% growth in 2021 albeit from a very low base.

Recently, Turquoise announced an investment by Low Carbon Innovation Fund 2 (LCIF2) in Switchd, which operates MakeMyHouseGreen, a data-driven platform that allows homeowners to source and install domestic renewable energy generation, including solar panels and battery storage with other energy saving products in the pipeline. The investment will enable Switchd to roll out the MakeMyHouseGreen platform to a much larger number of customers. The latest episode of the Talks with Turquoise podcast series saw us interview Switchd co-founder Llewellyn Kinch about the UK energy market and national transition to decarbonisation, covering the rise of residential renewable energy and energy efficiency.

 

Adapting to the low-carbon economy

Meanwhile, investors should not forget opportunities on the other side of the energy market. Renewables are undoubtedly exciting investors, but there are also opportunities for fossil fuel companies to adapt their business models to the low-carbon economy. Turquoise advised GT Energy, a portfolio company from our first fund that develops deep geothermal heat projects, on its sale to IGas Energy, a leading UK onshore oil & gas producer. Under IGas ownership, GT Energy will progress its flagship 14MW project to supply zero-carbon heat to the city of Stoke-on-Trent through a council-owned district heating network.

 

A broad investment landscape

Forecasts show that renewables will increase to 60% of power generation in Europe by 2030, and 40% in the US and China by the same date.[5] As demand rises for climate technology, the investment opportunities in green finance are far broader than they ever have been. Undoubtedly, as the energy crisis continues, investor interest will continue to soar to even greater heights.

[1] https://www.iea.org/news/record-clean-energy-spending-is-set-to-help-global-energy-investment-grow-by-8-in-2022
[2] https://ihsmarkit.com/research-analysis/global-power-and-renewables-research-highlights-july-2022.html
[3] https://dialogochino.net/en/uncategorised/56938-global-wind-energy-council-vice-chair-brazil-offshore-wind-accelerating-2/
[4] https://www.edie.net/uks-clean-energy-investment-ranking-rises-after-government-sets-95-low-carbon-electricity-target-for-2030/
[5] https://www.spglobal.com/en/research-insights/featured/energy-transition-renewables-remain-the-cornerstone-of-future-power-generation

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