Confirmation of Payee - Global Perspective - How Banks and PSP's can get it right

$7.6 Billon – Yes this is the amount of loss globally from Authorized Push Payment (APP) scams projected by 2028 out of which around 80% is expected to be from Real time Payments.

To mitigate APP fraud, one effective measure is payee or counter party verification during payment initiation, often referred to as Confirmation of Payee.

Confirmation of Payee is a service where the recipient’s account number, Legal Entity Identifier (LEI), or other business identifiers are matched with the name before the payment is initiated. This ensures the sender knows the payment is directed to the correct party, as the institution confirms the beneficiary's name in the payment chain.

Countries vary in their approaches to payee verification, as shown in the high-level diagram.

For global banks and financial institutions, building infrastructure that accommodates these variations across different countries or schemes is crucial to streamline workflows.

Payment initiation requests can originate from various channels, such as mobile banking, e-banking, or corporate ERP systems. If payee verification is requested, it is directed to the bank's payment hub, core banking system, or payment orchestration layer. The payee verification process must comply with the rules of the relevant payment scheme. For instance:

• In India, the UPI system verifies Virtual Payment Address (VPA) through an API call to the central infrastructure.
• In schemes lacking central infrastructure, banks can form bilateral agreements to exchange details via API or messaging systems.

While not all payment schemes mandate payee verification during payment processes, beneficiary name checks may still be required, as is the case with India's NEFT system.

Challenges in Payee Verification:

• Single Payment Requests: For requests originating from payment initiation channels, banks perform payee verification through APIs. User experience plays a pivotal role, as the verification functionality and response must be seamlessly integrated into the payment channel's workflow that too with the defined SLA (fraction of seconds). Third-party channels, such as Open Banking, add complexity in ensuring smooth user experiences.
• Bulk Payment Requests: Handling bulk payments involves segregating individual transactions for payee verification, processing each payment separately, and providing corresponding responses. This creates complexity since payee verification is typically conducted on a single-transaction basis.

Conclusion:

Payee verification is set to become standard practice in payment initiation, particularly for real-time payments, where APP fraud is prevalent. In countries where clearing schemes do not mandate this service, banks may offer optional payee verification, often charging a nominal fee for it. For global banks, establishing robust and adaptable infrastructure is vital to support payee verification as it becomes the norm across different countries.