Is Big Tech a help or hindrance to the payments sector?

by George Iddenden, Reporter, The Payments Association
Big Tech

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What is this article about?

Big Tech’s responsibilities include combating and reimbursing victims of online fraud, particularly authorised push payment (APP) scams, and their growing influence in the financial sector.

Why is this important?

It highlights the debate over who should be liable for fraud reimbursements and the impact of Big Tech on the traditional banking sector.

What’s next?

Finding a balance between regulation and collaboration with Big Tech to address fraud and enhance consumer financial services.

In December last year, Santander UK chief executive Mike Reigner called on Big Tech players, primarily Mark Zuckerberg’s Meta, to take their fair share of responsibility for reimbursing victims of fraud as cases skyrocket.

Reigner told the Mail on Sunday that the UK’s combination of an internationally used language and faster payment systems presents the perfect storm for scammers fraudulently taking money from consumers.

Since 2019, the UK’s banking sector has been refunding customers who become victims of authorised push payment (APP) scams, causing heated debate among industry professionals who believe the responsibility should lie elsewhere.

This year, rules laid out by the Payment Systems Regulator (PSR) in 2023 will come into force. The rules stipulate that both the sending and receiving firms should hold equal liability when reimbursing fraud victims in most cases. The rules have received widespread criticism from insiders and industry bodies alike. UK Finance has hit out at the PSR’s rules, which avoid the mention of Big Tech in the conversation.

Big Tech’s role in facilitating fraud

According to data from UK Finance, nearly 80% of APP fraud cases in 2022 originated online, with social media platforms accounting for the highest share of around 75%. Further research by Barclays indicates that 87% of all scams occur on tech platforms, including social media, online marketplaces, and dating apps.

Being the primary source of reimbursement, the UK’s banking sector collectively believes, on the whole, that Big Tech should have more of a role in the reimbursement process. According to Nationwide’s director of e-commerce and service, Matt Cox, there is a need for a level “playing field” to meet the needs of consumers.

He told Payments Intelligence that those “who benefit from open banking and payments contribute proportionately to the costs.” As it stands, the risks and liabilities to support consumers are not evenly spread, Cox believes.

In early 2023, the government delineated its plans to combat online fraud in the UK. However, proposals to make tech companies responsible for compensating victims were scrapped at the last minute, much to the fury of the banking sector.

The strategy was applauded overall. However, TSB called on the government to force meta-owned companies, including Facebook and WhatsApp, to take on more responsibility.

In the three biggest categories of fraud, which are purchase scams, impersonation scams, and investment scams, 80% of incidents occurred through companies owned by Meta, according to TSB Bank.

Revolut conducted further research this month and found that 60% of reported scam cases in the UK originated from Meta-owned platforms, with 33% of total losses attributed to the social media firms.

Embedded finance as an enabler

PA Consulting’s recent Vision for Banking survey of 600 businesses found that just 69% of respondents believe that traditional banks will dominate the sector by 2030, while nearly half (47%) expect Big Tech firms to play a greater role. Embedded finance means that the ease by which non-banks can offer end-to-end financial services is becoming greater.

Olivier Ottavi, payments expert at PA Consulting tells Payments Intelligence: “Regulatory changes and modern API standards are levelling the playing field for non-banks, enabling them to offer end-to-end financial services products and compete effectively with traditional banks in payments.”

As a clear example of the growing involvement of Big Tech in the financial services industry, last year, Capital G, the independent growth fund created by Google’s parent company, was in talks to take a significant stake in UK-based challenger bank Monzo.

Ottavi says: “This highlights Monzo as an attractive proposition to Alphabet from an investment perspective but might also signal deeper collaboration between Google and the banking industry after an initial setback, which saw them halt plans for the Google Plex banking service.”

With the mass resources of most of the big players, investment in fintech is logical. Indeed, 73% of UK consumers believe their bank’s products and services are not tailored to their financial situation, according to PA’s survey. This makes Big Tech very well placed to leverage their distribution, customer experience, AI and data analytics strengths to bridge the gap, Ottavi explains.

Healthier competition?

Traditional banks are facing tough competition from fintech companies. They find it difficult to innovate and offer customer-centric services due to cultural and regulatory barriers. To overcome these challenges, banks are launching initiatives like HSBC’s Zing, which involves creating new brands, adopting modern technology and implementing better governance structures to cater to customers’ evolving needs. Ottavi believes, however, that these schemes may have come too late as the market is already saturated.

He says: “Competition is fierce, but it also presents opportunities for collaboration – a classic manufacturing and distribution model. By partnering with Big Tech, banks can leverage their financial services and regulatory compliance expertise to offer innovative solutions for customers’ evolving needs.

Challenger banks, including Starling and Clearbank, are embracing this model, Ottavi adds, by leveraging the BaaS model and positioning themselves as the go-to payment backbone for fintechs.

The power dynamic is shifting further towards the fintech space, of which Big Tech is having an increasing influence over. Ottavi says: “The disintermediation of customer relationships and payment initiation to Big Tech can represent a significant loss of control for banks, giving fintechs more power to negotiate favourable terms and conditions with banks.”

Ottavi uses the example of Apple and Goldman Sachs’ relationship regarding the Apple Card and how it illustrates how Apple’s superior customer experience playing a key role in negotiations.

On the other hand, Big Tech might be offering consumers a healthier market, Ottavi argues; with more options than ever, new players and the level of financial illiteracy, it’s a “daunting” task for consumers to select the best fit for them, he says.

“Big Tech’s role as aggregators, consolidating financial products into a single view and providing deeply personalised recommendations, can offer customers better choice,” Ottavi explains. The issue of course is that this makes it more likely for customers to switch banks when presented with better rates and products.

He adds: “Big Tech can now compete head-on by offering their own manufactured payment products. This mirrors how supermarkets have competed with mainstream products with their private labels.”

Levelling the field

Undoubtedly, Big Tech can positively impact the financial sector, given its resources and know-how to produce exciting products and services for consumers, offering more choices and a potentially more innovative sector. But Big Tech, as a facilitator for online fraud, an issue so prevalent in the space, makes a case for its involvement to be viewed as generally negative.

Gaps in the regulation mean that Big Tech has too much of an easy ride regarding backing out of conversations around responsibility in APP fraud. An issue which is contentious and causes friction among the legacy banking incumbents.

Collaboration is key, according to Cox. If there is enough incentive there for providers to create world-class payments experiences, a more functional ecosystem will be enjoyed by all.

Cox says: “If we are to tackle the collective challenges of fraud and create world-class experiences, then all providers, including Big Tech, must be incentivised to collaborate effectively in the service of UK consumers.”

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