With estimates suggesting £5bn worth of fraudulent bounce back loan claims have been made, it is frustrating knowing that there is a system available which could have been used to verify claimants in an efficient and secure way before any loans were paid. That system is open banking. Fraud could have been mitigated significantly if it had been employed from the outset of the scheme.
The speed / accuracy trade-off
At the height of the pandemic, businesses were clamouring for financial support, in order to save them from going bust in light of a global crisis peaked by unprecedented economic turmoil.
As a result, checks and balances were relaxed and the government was putting pressure on banks to distribute bounce back loans of up to £50,000 or 25% of annual turnover as quickly as possible. The risk to these financial institutions was low given the government guarantee of 80%. However, as the scheme developed, countering fraudulent cases was taken more seriously with 13 measures put in place. Despite this, these measures came in too late and were too focused on detection rather than prevention.
But the National Audit Office (NAO) found in its later report that counter fraud measures were implemented ‘too slowly to be effective’ and were ‘inadequate’. The institutions handing out the loans – of which 1.5 million were made, totalling £47 billion – could have used open banking to validate applicants. Not only could open banking instantly check the full details of a bank account using an almost entirely fraud-proof process, but it could have been done so cheaply and quickly before the loans were handed out.
An effective counter fraud measure
Fraud checks would be faster with open banking, because the person trying to take out the loan does not need to submit any details. Instead, they use biometrics such as fingerprints or face scans to verify their identity. This could have helped banks verify whether an account is genuine and allow them to independently verify any stated account details or activity.
As well as being more secure, open banking helps remove any chance of human error such as banks or building societies accidentally paying loans into the wrong accounts.
The verification process using Open Banking is effective and efficient. Using the technology, banks can verify information about an applicant’s account activity, including: how long the bank account has been active before the loan was applied for and when it was opened; whether it has been blocked in the past; whether the name matches the person’s bank account details; whether the stated income or expense details are verified by the bank’s own data.
HMRC: pioneering the use of Open Banking
HMRC is a pioneer when it comes to Open Banking, as it uses ‘pay-by-bank’, the world’s largest Open Banking use case to date, in partnership with Ecospend. This means that other government departments can use Ecospend to follow HMRC’s lead if they require a more effective anti-fraud strategy. Since March, ‘Pay-by-bank’ technology has seen more than £4bn worth of payments transacted, while also enhancing the tax payment journey. Using the technology has meant there have been no misallocated funds, due to there being no manual data entry points, while savings have also been made on traditional card fees.
Open Banking is updating the playbook
Open Banking can provide the Government and the banking industry the opportunity to work more closely together on important finance challenges and opportunities, from combating fraudulent transactions, to identifying risk exposure across institutions and developing more personalised financial products. Clearly, using such methods in the future could help avoid such high levels of fraud seen under the Bounce Back Loans programme.
As such, the Government can work with UK fintech firms to find new solutions to the problems they face. It can now consider new innovative technologies to reduce costs and the threat of fraud for consumers and businesses, even in the face of high pressure as with the Bounce Back Loan scheme.
James Hickman is COO at Ecospend, the open banking technology provider to UK Government
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