Co -authored by: Tanmoy Bhattacharjee
This paper offers a quick view of various initiatives around the world for payment security and efficiency.
Confirmation of Payee
Confirmation of Payee (COP) is a measure to prevent accidental or deliberate misdirection of funds to unintended recipients. It allows the payer to check and confirm the recipient’s name (name on the account being paid) before the payment is sent out.
The indicative process flow, illustrated in the context of UK payments, is shown below:
Apart from the obvious benefit of fraud or error prevention, the process adds considerable value to the payer. It adds an element of intelligence over and above a simple classification. For example, an account name ‘Luis Smith’ can have close matches with names such as ‘Luis Schmidt’ or ‘Louis Smith’ – if the system offers these alternatives as suggestions, there will be fewer false rejects. Similarly, an unavailability due to a time-out will leave the option to the payer to try setting up the payee later. Again, an unavailability due to a non-existent account will summarily end the transaction.
Apart from the obvious benefit of fraud or error prevention, Confirmation of Payee (COP) adds considerable value to the payer. It adds an element of intelligence over and above a simple classification.
In jurisdictions where the COP is present as a banking facility, it is offered mandatorily. It does not add any noticeable friction in the process of setting up a payee.
COP in an Open Banking Context
If the payment request is made to an Account Servicing Payment Service Provider (ASPSP) by a Payment Initiation Service Provider (PISP) on behalf of the payee, the payment initiation APIs will typically address a set of use cases, as laid out in a proposition document by the UK OBIE Standards Team (Source: A2(d)-Open Banking Standards Relating to Confirmation of Payee and Contingent Reimbursement Model Code, dated 01-Feb-2021). Before initiating a payment with the bank, the PISP will provide its customer with the facility to have a beneficiary verified and appropriate COP warning messages served. The PISP may get the COP done or request the bank (ASPSP) to do the same and provide the outcome to the PISP to pass on to the customer. Before or while authenticating the PISP, the ASPSP must receive and process the PISP’s requests to the effect of a COP being required to be done by the ASPSP or not. The open banking rails should enable the COP call and check by both the PISP and the ASPSP.
Similar Initiatives Across Geographies and Jurisdictions
Currently, there are multiple initiatives around the globe to enhance payment security and efficiency. These are enabled by an increase in the adoption of real-time payments, customer preferences for greater visibility and reduced friction in payment instructions, and the maturity of technologies such as APIs and microservices. These initiatives are underpinned by a set of common objectives. These include improving safety and transparency in transactions, increasing speed and efficiency in communications, and enabling a seamless customer experience.
NACHA’s AFINIS, US
In the US, NACHA’s Afinis, a membership-driven organization, is collaborating on a set of interoperability standards. The focus is to deliver a set of standardized APIs to enhance the efficiency and security of the modern financial industry. Several APIs have collaborated and are currently available for testing and implementation. The initial set of APIs include:
- ACH payment initiation – A standardized way to submit payment instructions
- Bank contact information – Quick alert to financial institutions of potential fraud
- Transaction status – Provide originators a real-time view of the transaction status
- Account validation – To ensure target accounts are valid. This account validation API, just like the CoP initiative in the UK, is expected to greatly reduce the number of payments returned due to closed, incorrect, or fraudulent account numbers. An API-driven approach will also enable streamlining of the processes for a seamless experience
Mandated Payments Service, Australia
The Mandated Payments Service (MPS) by New Payments Platform (NPP), Australia is another innovative initiative. It focuses on creating a framework that enables customers to authorize third parties to initiate payments from their accounts via the NPP infrastructure. These payment requests are associated with a mandate – a customer authorized payment arrangement. Key features of this initiative include real-time validation of customer accounts, real-time funds check, real-time notifications, and a centralized rich-data storage. The features are all designed to enable a fast, safe, secure, and transparent payment transaction process resulting in an enriching customer experience. MPS is expected to enable a whole host of use-cases including recurring payments, E-commerce payments, subscription services, and in-app payments, etc.
Initiatives such as CoP, Afinis interoperability APIs, MPS and many similar programs, are further proof that the payments industry is steadily setting up an enabling infrastructure that will result in a thriving open-banking ecosystem. With the ongoing pandemic further accelerating the push toward digital engagement models, there is no dearth of opportunities. The scale and pace of adoption of innovative digital services is only going to increase. It is up to the payments industry service providers to leverage these initiatives and continue providing transformative and enriching customer experience.