Tackling Bacs fraud and errors

Paul Stevenson at Finastra explains how to tackle costly errors and fraud in Bacs payments for corporates

In the last 20 years, we’ve witnessed considerable change and investment in the payments industry, with increased regulation, industry initiatives and fintech-led innovation resulting in increased security and efficiency.

This, combined with other factors such as economic growth, inflation and increasingly complex supply chains, has led to significant growth in payment volumes. Data from UK Finance showed that the total number of payments made in the UK increased to 45.7 billion in 2022 from 40.4 billion in 2021, and this trend is only set to continue. 

Bacs, which emerged over half a century ago to provide consumers and businesses with an effective alternative to making payments via cheques and cash, remains a popular payment method. 4.7 billion payments were made by Direct Debit in 2022 – with an overall value of £1,331 billion – and this figure is expected to increase to 5 billion by 2032. Direct Credit was the second most frequently used method by businesses in 2022, with 32% of payments made this way. This volume is expected to remain stable in 2032.

There are many reasons why Bacs continues to be trusted by UK businesses. Direct Debit, for instance, provides a convenient and secure way to simplify, automate and reconcile recurring payments whilst giving customers peace of in mind knowing that bills are paid on time. Direct Credit is still the predominant way for employers to pay wages and salaries as it is an effective means to streamline payroll processes for employers and deliver funds to employees automatically and securely.

Higher payment volumes pose greater risks

Despite the well-known benefits of Bacs, as payment volumes continue to grow, so does the risk of increased errors and fraud for businesses. When customers provide their payment details to set up a payment instruction, the funds may be misdirected due to human error. Corporates must then manually correct instructions at the point of failure by contacting the customer, causing delays and increased operational costs. 

Let’s imagine a consumer sets up a Direct Debit Instruction (DDI) to a business that contains an incorrect sort code or account number. On day four or five, the failed DDI is returned and requires correction. On day ten plus, the first payment fails and requires manual intervention and, some time after this, the account holder may issue an indemnity claim under the Direct Debit Guarantee.

For the customer, the experience is painful and full of friction. For the company, the additional resources needed to resolve errors and chase missed payments can be costly and detrimental for survival. In an age where customers expect access to quick and seamless services, this can also potentially damage customer confidence and retention.

If a Direct Credit fails, businesses may face difficulties getting the money back and they often have no visibility on lost payments until a supplier or employee queries a missing payment. It is also susceptible to Authorised Push Payment (APP) fraud. UK Finance reported a substantial rise in APP fraud from 2022-2023 via Bacs, with volumes rising 41% in H1 2023 and amounting to £13.2 million (up 6% from 2022). Given the ongoing pressures to grow while keeping costs down amidst a challenging economic climate, financial losses due to errors and fraud can have a severe impact.

Confirmation of Payee for businesses

Confirmation of Payee (CoP) and Payer Name Verification (PNV) were launched by Pay.UK in 2019 and 2023 respectively to help users verify that they are sending payments to, or collecting money from, the right account holder via their bank.

The service was recently made available directly to businesses, providing peace of mind when making high-risk, high-volume or high-value transactions. It works by performing a real-time check with the bank of the account holder, verifying that the account details provided are correct, that the account exists and that it belongs to the name provided. 

Checking the data given is correct when payers give their payment details to a call center or on a website, gives businesses the opportunity to prompt for the right details in real-time. Payment timescales, manual interventions and indemnity claims are subsequently reduced, resulting in cost savings and better user experiences. Alongside these benefits, Direct Credit users can also significantly reduce the risk of APP fraud.

Corporates looking to streamline their payment processes should opt for a feature-rich Bacs payment solution with modules that include CoP and PNV. Such solutions allow businesses to use the service in different ways. For example, they can embed the service within their systems or website via Open APIs, to facilitate real-time error checks and corrections during the sign-up process.

They can also automate the verification process when uploading transaction files, ensuring accuracy and security in transactional data. Finally, users can effortlessly verify new and modified accounts when they are entered into the software, strengthening the integrity of financial activities.

Financial, legal and reputational damage can have an irreversible impact on businesses. As volumes of payments and fraud show no signs of slowing down, CoP and PNV are positive steps towards protecting businesses in the UK that use Bacs – as well as other payment methods – while ensuring their customers receive the seamless experiences they expect.

Paul Stevenson is Senior Product Manager, Financial Messaging Marketplaces, at Finastra

Main image courtesy of iStockPhoto.com